State Tax Reform Advice For 2014 — Think About Spending

Writing for a tax magazine, I have always focused on the revenue side of public finance. I believe that there is either a right way or a wrong way to raise money to pay for public services. Everyone assumes that any significant changes to the tax system must occur in a revenue neutral way – that is, we will be spending the same amount of money after reform as we did before reform. I have written about this before, making the point that there is no reason to limit changing the tax system in this manner. Neutrality is a political contrivance – designed to show that liberals and conservatives are nice people.

But in thinking about tax reform efforts in the past year, I am more convinced than ever that our refusal to rethink the size of government makes fixing problems with the tax code impossible. Here is what we know. Cutting government programs is difficult because each program has a constituency that will fight like a gladiator to protect its access to public money. So when the topic of tax reform comes up, conservatives and liberals vow to find a fix that will neither raise nor decrease spending. But we also know that politicians – the majority anyway – generally hate raising taxes. This reflects the fact that most of their constituents hate the idea of paying more taxes. But the costs of government continue to increase. And that leads to worse tax policy as states look to gimmicks, excises, gambling, and other junk ways of collecting revenue. It also ensures that some horrible tax policies are never fixed.

For example, business entities pay about 50 percent of all sales taxes in the United States. They should probably pay zero. Repealing the sales tax on business inputs would cost billions of dollars. No one has the guts to call for such repeal because it would require that other taxes be raised or government services be cut. One can make the same argument for repealing the state corporate income tax and the state estate taxes, neither of which work well in an open, global economy.

My advice? If you are not willing to pay for a certain level of government with broad-based taxes on personal income, consumption, and property, reduce your spending.

Source: Forbes Business

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