Wednesday, July 09, 2008

making our taxes more regressive

In 2006, Utah had the 8th highest tax burden in the United States (It might have moved down to 12th since then). Not being satisfied with high-taxes in one of, if not the most Republican state in the union, our legislature is contemplating Mike Huckabee's dream: a flat (high) sales taxes to replace all other taxes. It looks like our legislature is trying to make this state another testing ground for conservative ideas that can't gain purchase anywhere else (even after the school voucher debacle).
For 18 years, [Thomas] Wright, former executive director of Texas-based, has spearheaded a national grass-roots effort to shift all federal taxes to a broad sales tax on goods and services.
Business purchases of goods and services used in operations would be exempt from the consumption tax, which is a kind of sales tax aimed only at the end user.
A legislative working group has analyzed the theory for several months but has yet to formulate a proposal, said Rep. John Dougall, R-Highland, who co-chairs the committee.
And so far, no state has a broad-based consumption tax, said Bryant Howe, assistant director of the Office of Legislative Research and General Counsel.
Howe presented the pros and cons of taxing consumption rather than property and income. While it would encourage savings and investment among wealthy residents, the less-well-off would struggle.

This is a very bad idea policy-wise, for several reasons. First off, the poor and middle-class spend a greater percentage of their total income on things that would be taxes by this super high sales tax than the rich would. For someone like Gov. Huntsman, most of his money is spent buying stocks/bonds and a rather paltry portion is used to buy things like food and gas (especially since he is governor). Not so for 90-something percent of Utahns. So this would be a de facto tax hike on most of us, while an effective tax cut for the rich, whose property taxes and income taxes make up the bulk of their overall state tax liability.

A lone consumption tax would be more volatile, [Mark] Buchi[, a Salt Lake City tax attorney and former state tax commissioner,] said, netting a windfall when consumer spending is high, but starving the government's ability to provide basic services when people tighten their belts.
But hey, we don't have to worry about that right, because the economy is in great shape!...Oh wait, scratch that.

Third, supporters claim it would encourage savings, which in the abstract might sound like a good thing, but it is not necessarily, and there is no guarantee that that would necessarily happen. In Utah, like everywhere else in this country, spending outpaces earnings (in fact, we are near the tops in the nation in bankruptcy filings) and that money, by in large, stimulates the local economy. Think about all of the boat dealers that would go out of business if a high-sales-tax-only policy really caused people to save. Moreover, would the rich be anymore encouraged to save than they were before? As others have pointed out, most of their money is placed into high-yield instruments like stocks and bonds, which offer either no or deferred taxes (and when reckoning day comes, at lower rates than this super sales tax), not a local bank account, which offers practically zero percent interest. The less well off but financially literate, the ones most likely to be encouraged to save other than the rich, would invest their money similarly. Lastly, think about that tax cut simulus you got this spring/summer. Did you use it to spend or to save? Congress and the President thought it would stimulate spending, and the results were pretty minimal (and the rich invested it rather than buying another fur coat or whatever). [The simulus checks were pretty much washed out by the rise in gas prices too, but that's another topic for previous day]

Anyway, our tax code should be going the oposite direction from the way Rep. Dougall is contemplating. We should be eliminating taxes and fees on things that lower- to middle-class folks spend the majority of their money on: food (as apposed to dining out), clothes, fees to use the public pool, buying school supplies/textbooks, etc. And we should be creating progressive tax brackets. Sure maybe it will scare off some of the ultra-wealthy, but we shouldn't get into a race to the bottom.


Obi wan liberali said...

Where Dougall is going? It is the typical Republican philosophy that cutting taxes on the rich will increase investment in Utah's economy and spur growth. However, capital is highly mobile and can be invested in other states and other countries.

What makes the sales tax attractive to lawmakers is that the burden isn't as visible as it is with the income and property taxes. You pay piecemeal throughout the year, yet you never see the full extent of your tax burden. That is why fees are so popular with Republicans as well.

I addressed alot of the sales tax issues in a post over at The Utah Hornet's nest.

Scott Kenney said...

I'm a newbie here, having just come across this post doing opposition research on John Dougall. While I am generally sympathetic with the anti-consumption tax arguments above, I'd like to suggest that some targeted consumption taxes might be helpful. I'd eliminate sales tax on essentials such as foods, medicines, clothing, etc. but increase or add taxes on bottled water, soft drinks, candy and other junk food--products with demonstrably negative health and environment consequences(see "Killer at Large" now showing at the Tower).

Utah's high tax rate is in no small part due to demographics--large families. Since a poll tax is out of the question, how do we fund education?

Property taxes are relatively stable and therefore a reasonable source of revenue. But that rate(especially on Macmansions)is the third rail of Utah politics. (The notion of bonding for a public library in Alpine, where I live is anathema. Many, many Utah towns smaller and obviously less affluent, have public libraries, but not the wealthiest community in the state (actually, neighboring Highland may be more affluent, but ..).

How will Utah increase teacher salaries and school supplies, subsidize health care insurance for the poor, and provide other badly needed social services without increased revenues? We are used to the concept of "sin" taxes on tobacco and alcohol, are they not consumption taxes? I suggest rather than tossing out the baby with the bathwater we take a look at other targeted consumption taxes, including "sin" taxes and other discretionary products and services such as new gas-guzzling vehicles, restaurant meals, tickets to sporting events and concerts.

Consumption taxes on non-essential products and services ought to be considered part of a fair and socially responsible tax system.

Oldenburg said...

I would agree with many of the points you make Scott and with Obi's point that fees and consumption taxes are politically palpable to the public.

How to fund education? Taxes on "sinful" items, luxuries (resturants, expensive cars, tickets), etc. might be a start, but it isn't going to close the loop. And raising property taxes is difficult to say the least. There is some evidence that taxing things discourages some behaviors public policy disfavors (like smoking & buying gas-guzzlers) but in so doing, could make this an unstable revenue stream. Moreover, you might hurt certain industries, like yatch-making in New England after the federal luxury tax was imposed.

The only avaliable avenue then, it seems, it to tax people's worth. That means not only salary income but dividends and the like. This is a stable tax source that won't be depressed by an increase of taxation (the high tax rates of the 1950s didn't slow the post-war boom, nor did the tax rates of the 1990s slow that boom).

Sin taxes are already the only tax everyone can agree on raising without any objection--in every state except those that grow tabbacco. But like I said, it isn't something big or stable enough to fund something as important as education with.

Scott Kenney said...

I agree with all of your points. Consumption taxes (here defined as sin and luxury taxes) should not relied upon to fund education. However, as a form of sales tax and even though sales taxes fluctuate from year to year, they are an essential budgetary line item.

Increasing the scope of sin and luxury taxes increase revenues and promote a healthier lifestyle, leading to a more productive workforce and lower public health costs.

I live in a conspicuous-consumption community. My neighbors' tax advisors exploit income tax loopholes--a "luxury" many of us cannot afford. Income taxes are more susceptible to manipulation than consumption taxes.

Yacht-makers? Tell it to employees of GM, United Airlines, textile industries, or software companies.

Stable salaries? Not for those of us laid off in our forties, fifties, or sixties--and we are not a few. Stable dividends? Not according to my 401k statements.

Property taxes? Chat with my lower-middle class daughter whose husband was transferred out of state, can't sell their home, and still pay inflated property taxes.

I am not opposed to property, income, sales, or dividend taxes. But in addressing the state's needed revenues, targeted consumption taxes should be among the first to be considered for expansion.