Tax Analysts Blog

Tax Advice for State Legislators of All Parties

Posted on Oct 30, 2013

With the state legislative season on the horizon, I thought I would provide some tax policy advice for state lawmakers. For conservatives, I offer the following: First, remember that citizens want a certain level of state and local government. No amount of blustering and hyperbole and antitax rhetoric will change that. People want good roads and schools and reliable public safety. We should pay for those services with real, broad-based taxes -- not gambling, excises, and other gimmicks. Second, conservatives should recognize that good tax policy is consistent with their belief system. They should reject tax incentives and other forms of crony capitalism. The proliferation of tax incentives represents horrible tax policy. That politicians can impose economic policy through tax incentives is more akin to a Soviet five-year plan than to anything Adam Smith ever said.

True conservatives should fight attempts to use tax policy to further economic objectives. A broad base and low rates will always serve the conservative cause better than the existing nonsensical tax laws. Standing on principle to ensure a broad tax base is hard. But it's a stand worth taking. Third, conservatives should take advantage of the existence of numerous unsound tax policies and try to fix them. For example, everybody agrees that business inputs should generally not be subject to sales tax. Liberals will never fight for their repeal or reform because of their misguided belief that "business" should be paying taxes. This is a perfect issue to use to advance a conservative objective. Taxing business inputs results in hidden taxes on consumers. But transparency is and should be a conservative virtue.

I have advice for liberals as well. First, stop making the issue about screwing the rich. Most Americans don't buy into the class-war arguments. No one has the stomach for fleecing the rich guys simply because they're rich. We have learned that time and again. That is why there are constant efforts to reduce top marginal rates. It may be that Americans all hope they'll be really rich someday, and if they are, they wouldn't want to be saddled with higher taxes. It may be that Americans buy into the belief that higher marginal taxes harm economic growth. I'm not saying that we shouldn't ask the rich to pay taxes. I am saying that we shouldn't make this debate solely about taking their money.

Second, liberal friends need to understand that people -- rich or poor -- don't like to pay taxes. Almost everyone, including me, would prefer to spend their money on themselves. If anyone tells you different, they are lying. We pay taxes for two reasons. Many people accept the social contract that taxes pay for civilization. They understand that they pay for roads and schools and police officers, all of which make life better. And we pay taxes because we have to. There's a reason that taxes aren't voluntary: It's because, despite the social contract, no one really wants to pay them. That isn't necessarily a bad thing. But it requires liberals to argue that government spending is a normative good -- that people get value from public services. The more value citizens see in their government, the less cranky they'll be about paying taxes.

Third, liberals should recognize that some methods of revenue-raising hurt the poor -- a lot. The left has never been on board with criticizing excise taxes, largely because its members don't want to seem allied with the tobacco industry. Yet, excise taxes when used to raise general fund revenue are notoriously regressive. We know that cigarette tax revenue in some states falls short of the costs of funding smoking-related healthcare. We should support higher cigarette taxes in those states. But using higher cigarette or alcohol taxes to fund education or public safety or raises for politicians is unfair and dishonest. If you care about the poor, fight the unprincipled use of excise taxes. The left also sits in the shadows while states expand their gambling enterprises to raise revenue. Gambling is regressive. Using gambling revenue to fund government is unfair and dishonest. The left should be leading the fight against gambling.

Both parties should also give serious thought to greater reliance on the property tax. Yes, I know people hate that tax. I also know that politicians find it advantageous to attack it. But the property tax revolts of the late 1970s and the 1980s have badly damaged the fiscal structure of state and local governments. There was a time when schools and most public safety services were funded locally through the property tax. The property tax revolts and the ensuing limitations shifted that funding to the states. But state government responsibilities for healthcare and transportation have been growing. Now the states have a greater role in financing education but cannot afford to do so. A stronger property tax would reduce pressure on state finances -- and more importantly, would return greater autonomy to local governments. Liberals and conservatives should be able to live with more revenue for schools and greater local autonomy.

Read Comments (3)

AMT buffOct 30, 2013

"A stronger property tax would reduce pressure on state finances -- and more
importantly, would return greater autonomy to local governments."

False. Courts everywhere have required states to redistribute property tax
revenue statewide. The property tax is no longer a locally controlled tax. It
is just another state tax.

Without control of their revenue stream, local governments are increasingly
being compelled by state government to act against the wishes of their local
voters. There is not yet a Tea Party movement opposing this trend, but there
will be.

David BrunoriOct 30, 2013

Mr. Buff, I disagree. I think you are referring to the school finance
litigation. Usually, the courts have ordered the states to equalize spending
between rich and poor districts. And I think only NH and VT have tried using
the property tax to redistribute wealth statewide, By the way, that is a
terrible thing to do.

I think the problem has a lot more to do with property tax limitations and a
general public dislike of the tax.

I agree however with your second point. 100 percent.

emsig beobachterOct 30, 2013

States can regulate aspects of property taxes such as assessment ratios,
maximum or minimum millage rates, circuit breakers, etc. but in general it is
still a locally administered tax. Prior to the Great Depression of the 1930's,
states also administered property taxes but left it to local governments when
they adopted sales and in some cases, income taxes.

States often administer, or impose their own property tax on
multijurisdictional property.

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