Thursday, March 02, 2006

Meaningful Tax Reform a Casualty of Politics

The 2006 legislative session is thankfully over. (See here for an adequate report on the outcome). I must admit that I feel rather jaded because the legislature fell apart on one of my hot button issues: tax reform. A few days ago, Rep. Steve Urquhart sounded triumphal about finally cobbling together an agreement between the House and the Senate on tax reform (see here). But when push came to shove, politics won and taxpayers lost.

Although the legislators can say that they cut taxes, dabbling in some business tax cuts and achieving a hard-fought marginal tax cut on food items, the achievements are insignificant. Rep. Steve Urquhart blogged here about the earlier demise of an understanding between the House and Senate to completely scrap the sales tax on food. When the marginal decrease that finally passed goes into effect next year, we will have the confusing situation of paying slightly different tax rates on food items and non-food items.

I realize that the people that worked hard on this are happy to have gotten any decrease at all (perhaps seeing it as a foot-in-the-door achievement), but the ultimate impact on taxpayers is weird. Either the sales tax on food is good or it is not. Why tax food at a marginally lower rate than other items? If the tax is bad, get rid of it altogether. I realize that there are arguments against dropping the tax, but to only sort of drop it creates a strange situation.

My biggest beef is that even with the largest revenue surplus in state history, legislators were unable to figure out a way to enact meaningful income tax reform. I have blogged here, here, and here about this issue. Governor Huntsman is set to call the legislators back for a special session to work this out. It appears that the legislature managed to squander the time of the regular session focusing on things they deemed more important than tax reform. It’s not that they didn’t have sufficient time (see my post favoring a short session). They simply failed to use it effectively.

But seriously, the $65 million prospective tax cut they are talking about is only a small fraction of the overall surplus (around 7%). Although LaVarr Webb would call this a moderate tax cut (see here and here), it’s chickenfeed compared to what was available. It seems bizarre that legislators were unable to come to a consensus on returning even this nominal amount to the overcharged taxpayers. This really sticks in the craw of small government types.

So who were the big winners of this session? The biggest winner is the beast of the bureaucracy. We chose to feed the beast unprecedented amounts rather than having it go on a diet. Transportation is a big winner. Done properly, this can mean that all Utahns are winners as well. LaVarr Webb eloquently discussed this in his posts that I cited above (especially the first one). Education took the lion’s share of the surplus, garnering a 10.6% increase that includes a 6% increase to the Weighted Pupil Unit. The USTAR initiative passed, aiming to develop new technologies in Utah and then keep the resulting businesses here. We’ll have to see how it works in application.

And the losers? Being a believer in small government, I have to say that the taxpayers are the biggest losers. We have established a budget precedent that may come back to bite us when the size of the revenue stream inevitably diminishes. Since it seems impossible to put the bureaucracy on a starvation diet in lean times, overfeeding it in times of surplus instead of controlling its growth often translates into future tax increases. We’re also going to waste taxpayer money again to hold an early presidential primary in a vain attempt to get more respect for our state in national politics. The creationism crowd’s anti-evolution bill went to the junk heap.

Education is another loser. What, education?! I thought I just said it was a winner. Yes, it won a lot of funding, but it’s a loser—in two ways. First we are dumping more money into education without any significant reform (see my post about real education reform). As with all money-throwing efforts that fail to enact effective reform, we will ultimately get nothing of value (or worse) for our additional spending. Second, the public education industrial complex will still howl that it is yet hungry and has been inadequately fed. As it is presently constituted, we will *never* be able to satisfactorily fund public education. We will never have enough revenue to assuage the beast. There is no logical limit to the system’s perceived need. The only answer is very real, painful reform. We do not yet have the public or political will to pull that off, but the day that we do may be coming.

All in all, the results of this legislative session are mixed. Some good stuff, some bad stuff. I believe it is unconscionable that the legislature failed to achieve meaningful tax reform. I think it shows an inappropriate focus and bodes future problems. Still, I thank all of those that worked to make our representative form of government work, especially our elected officials. Some of you may have to face the ire of grassroots conservatives in the months ahead.


Anonymous said...

One of the difficulties with tax reform, is we're talking small amounts of money per family. By my calculation a family spending $500 a month on food would save $375 a year on their tax bill (12*500*0.0625) if the sales tax on food were completely eliminated. If I spend even one complete day lobbying legislators on this, I've lost money. But the special interests can make enormous returns on their money by pooling their resources and hiring a lobbyist.

steve u. said...

I wish you wrote for a newspaper. Even though I don't think you were there, you hit much of what happened at the legislature right on the head. We wasted entirely too much time on things that don't compare in importance to an income tax reduction. There would be fingers pointing in all directions, if I started to lay blame for this. And, of course, being in a leadership position, I'll take my fair share of the blame. Part of the issue, though, is that this is so important. There is serious disagreement whether we should simply cut $70M from the existing system (my position) or whether we should rework the system (the Gov's position). But, it's important to note that the money hasn't been spent; it's still there, so that we can resolve this dispute -- and I think we will.

Yes, no one makes movies about incremental advance. It's not sexy, but it mostly is the way government works. The House fought very hard for total repeal of the food tax. Though we didn't get it, we got a chunk of it and got the ball rolling in the right direction. With an election around the corner, citizens can get as frisky as they want on this issue and force candidates to take clear positions whether they will vote to repeal the food tax (Yes, for me).

On the education front, take a look at my 1 HB 181. You might like some of the concepts it introduces.

Thanks for contributing to the process with your thoughts. I'd be very interested to get your thoughts on reducing the top rate of the current system v. the Gov's proposal.

Scott Hinrichs said...

Thanks Mark and Steve for your comments. I wasn't present at the legislative session, but I followed a lot of what was happening. There is a lot more information about events there than there used to be, thanks to the new media.

I understand the incremental approach to tax cuts. I also understand the necessity of accepting what is politically possible. That's how our system is designed to work.

I understand that the money for the cut has not yet been spent. I very much hope a special session puts it into a meaningful tax cut. But I am disappointed that legislators were unable to get this done during the regular session. It shows that many legislators had their priorities messed up.

Steve, I have read a number of analyses of the pros and cons of the governor's income tax plan vs. simply cutting the rates of our current plan. I had been leaning more toward the flat tax concept prior to reading these. I now agree with you that it is in the long-term best interest of the people to keep the current system with lower rates.

I understand why the House stood firm on this position. I think that if this issue had been seriously approached earlier in the session we would have had a resolution. I'm going to chew on my Senator's ear about that.

plaidspolitics said...

I have to say I'm actually glad that the tax reform didn't go through. It was run as synonymous with tax cuts. This just isn't so. At least not if you're looking at the Governor's plan. That was reform that would cut the tax *rate*, but increase the base that the rate is applied to. Rather than the Federal Taxable income that the rate is now applied to, you would lose the standard/itemized deductions and the personal exemptions and have the rate applied to the Federal Adjusted Gross income. The less money you make, the more significant this difference is. This results in a tax increase for most of us.

I agree the food tax should just be completely removed. The reduction on the food tax is not a loss in revenue. That's why it's okay to only reduce the rate and not elminate it. 0% of anything is 0. But the 2% rate cut still leaves 2.75% to be applied to the sale of food.

Inflation, energy costs, etc. are driving the price on food up. The population in the state is increasing, meaning there are more mouths to feed. This results in a higher number of purchases on food. Both of these are an increase of the base that the rate is applied to. So in essence, a tax rate cut will only reduce the rate that the growth of revenue from the sales tax occurs.

Let's talk a little math here. So, for example. You have an item that cost $1 and now, due to inflation and energy costs, the item costs $1.30. The old rate of 4.75% applied to the old $1 rate results in a nickel going to the state on that item. The new, lower rate, only takes 4 cents from your pocket. You saved yourself one cent in taxes, even with the higher price!

Now you consider that there only needs to be an increase in the population of one person for every five existing people to make up that penny, and you can see how the rate reduction results in no revenue loss. Only a loss on the increase of the revenue.

Legislators and other politicians don't like having 0% applied because it results in an actual and complete revenue loss. It won't happen unless they find a way to get it from somewhere else.

I'd like to see a significant reduction for all income taxpayers. This would be more beneficial than removing the food tax.

Food tax isn't really as burdensome to the poor as most believe. Those who honestly struggle to earn a decent living are those who do not qualify for food benefits like food stamps, WIC, federal school lunch/breakfast program, and other charitable food programs privately or religiously organized (like the Utah food bank, Salvation Army, Bishop's Storehouse, etc.). Families who qualify for these benefits do not pay any tax on any of these benefits. The ones who are honestly struggling are those whose income falls just above the income eligibility ceiling for these kinds of programs. Those who are of the lowest income already have the food tax removed from their food purchases, because there is no tax charged on these sources.

I think you have to consider that the legislators indirectly raised "taxes" in subtle ways, like charging fees for concurrent enrollment or permitting private, foreign companies to build toll roads. Just more ways for the government to collect money without calling it a tax.