HOUSE Republicans are to be commended for proposing a package of tax changes that includes some long-overdue and politically difficult reforms. But while this marks the most serious proposal we’ve seen in years, some of its “solutions” are worse than the problems, and it fails to address so many of the worst problems with our antiquated, special-interest-driven tax code that it can’t be considered comprehensive — and shouldn’t be considered anything more than a starting point for debate.
Our tax code was built on the three-legged stool model favored by economists, deriving roughly equal revenue from the sales, income and property taxes. But we have come to rely too heavily on the volatile sales tax, and we have shot too many holes into that tax, making it even more volatile. Significant problems with the other taxes add to the inequities inherent in the sales tax and prevent revenue growth from keeping pace with economic growth.
The most obvious problem is our 110 sales tax exemptions, and the grossest example of bad exemption policy — the poster child, in fact, of bad tax policy — is the $300 tax cap on automobiles, which means people who buy clunkers pay the same tax as those who buy luxury cars. Or yachts. Or planes. Compounding the problem, our state has done little to update a sales tax code that was written when we spent nearly all of our money on “things” rather than services.
As a result, more than half of sales go untaxed. So our sales tax doesn’t grow with the economy, forces poor people (who buy mostly things) to pay a far higher portion of their income than wealthier people and is much higher than it needs to be. As the Legislature’s own Taxation Realignment Commission found, we could easily reduce the tax by a penny or two simply by expanding the reach of the sales tax more in keeping with other states.
To their credit, House Republicans propose to eliminate two-thirds of the exemptions. Although a few of the targeted exemptions actually make sense, that’s not the major problem with the list. The major problem is that it doesn’t touch the most expensive exemptions, and it doesn’t tackle the untaxed services. Most egregiously, it ignores the car tax cap. So even eliminating all those exemptions, we’d still be taxing less than 40 percent of sales. That means that the list might be an improvement, but not much of one.
And the bad parts of the plan more than outweigh that limited good.
The income tax has its own confusing and often unwise array of exemptions and exclusions, the top rate kicks in at too low an income level, and its convoluted calculation methods make it look like we charge much higher taxes than we actually do. But rather than tackling these problems, the House plan consolidates some of the rates, to make the tax flatter — which isn’t necessarily good, since the benefit of a progressive income tax is to balance out a regressive sales tax. It also phases out the corporate income tax, even though ours is among the lowest in the nation. In short, the income tax section is nothing more than tax cuts masquerading — and not very well — as tax reform.
But by far the worst part of the package is the way it proposes to fix our deeply flawed property tax. The property tax law forces renters to pay far higher taxes than homeowners, places an anti-competitive burden on manufacturers and allows some landowners to pay pennies in taxes by claiming their beachfront and other prime real estate as farmland. A 2006 law prohibits governments from fully taxing properties that appreciate the fastest, shifting the burden of taxation to the majority of property owners who are not so lucky, and forcing them to either pay higher taxes or make do with fewer services.
The House plan reduces the burden on manufacturing and rental property, which desperately needs to be done, but it ignores the other problems. Worse, it forces counties, cities and schools to absorb the cost, projected at more than $1 billion a year once the changes are phased in. And because state law severely restricts how much local governments can raise taxes, in some cases they won’t have the option of raising rates to make up the difference.
We would have a hard time supporting a plan to cut state taxes by $1 billion a year, since we have some of the lowest taxes in the nation and aren’t providing the basic services we need to, but it is beyond the pale to force such a tax cut on local governments. Local officials are elected by the voters to run their communities; they should be able to set whatever tax rates they see fit, knowing voters can replace them if they don’t like those decisions.
If the Legislature is going to take credit for cutting taxes for some, it should either reimburse local governments or raise local tax rates itself to make up the difference. It also should free local officials to set tax rates, much as the Legislature itself has the power to set state taxes. But the other problems with the package need much more work than that.
If the House leadership team is serious about reforming our tax code, it will get to work addressing those problems. It would be a shame to let the good work in this package go to waste, but that’s what needs to happen if this reform package isn’t itself reformed.