Tax Analysts Blog

Confusing Tax Cuts with Tax Reform

Posted on Nov 27, 2013

The American Legislative Exchange Council recently released a report detailing the tax cuts of the past year. It can be found here. The report notes that 18 states cut taxes in 2013. ALEC thinks that’s good, as do I. The states -- in case you have not been reading your State Tax Notes -- are Alaska, Arkansas, Florida, Idaho, Indiana, Iowa, Kansas, Mississippi, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Tennessee, Texas, and Wisconsin. Most of the tax cutting states are red, with a few purplish ones sprinkled in. The problem is that in many of these states, tax cuts were touted as tax reform. (By the way, Democratic states tend to do the same thing; they herald higher tax burdens as sound tax policy.) But increasing or decreasing tax burdens should not be confused with tax reform. Tax reform should mean something. I define tax reform as meaningful changes to the tax system that comport with the general notions of sound tax policy. The goal should be to make the system fairer, neutral, more efficient, and more stable. The changes should also increase economic development and job growth. And they should ensure that the government raises enough revenue to meet the public service demands of the citizenry. Changing the rates or tinkering at the margins is not reform.

Some measures ALEC highlighted were simply aimed at reducing burdens. But some were tied to sound tax policy choices. North Carolina had the biggest reform effort. It reduced rates, broadened bases, and eliminated several bad taxes. Florida exempted all manufacturing equipment from sales tax. That’s good tax policy. Business inputs should never be subject to sales tax. Some of the cuts amounted to good policy but didn’t go far enough. Idaho exempted the first $100,000 of property from its personal property tax. That’s great, but real reform would have eliminated this very bad tax. Some of the tax cuts were not only inconsequential, they were bad tax policy. Tennessee cut the sales tax on groceries from 5.25 percent to 5 percent. This imperceptible change is actually unsound, because the sales tax is a poor vehicle for providing meaningful relief to the poor. In any event, the ALEC report is worth reading.

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