BY THE standards of our tax-cut-happy Legislature, slashing taxes by $60 million for doctors, lawyers and other small-business owners is the sort of thing you do before breakfast; it’s pocket change. What sets this year’s last-minute tax cut apart is that no one even tried to explain why taxing small businesses at the same rate as big businesses, and a lower rate than many individuals, was the biggest problem with our tax code (hint: it isn’t) — a problem so big that it justified reviving a discredited procedure that is nothing short of legislative extortion (hint: it didn’t).
The Legislature’s latest piecemeal change to our tax code applies to “pass-through” income — the profits from limited liability corporations, S corporations and sole proprietorships, which owners and shareholders report on their personal income tax returns. These profits used to be taxed like regular income. So a solo-practicing physician who made $250,000 a year was subject to the same 7 percent top marginal income tax rate as a physician who received a $250,000 salary from a hospital. But in 2005, the Legislature lowered the pass-through tax to 5 percent. That’s the rate charged to corporations, and so the change made some sense.
This year, after hearing from favored constituencies and spending much time behind closed doors, the House Republican Caucus decided to cut the rate an additional 40 percent, to 3 percent, or less than half the top rate for salaried workers.
And the reason for this? Well, there wasn’t much of one given or even asked for, because this was a relatively small part of House Republicans’ over-hyped plan to eliminate some sales tax exemptions and reduce property taxes for manufacturers and other businesses, which we’ve long known were problems in our Swiss-cheese tax code and which got all the attention. To the extent that the pass-through tax cut was defended, it was in the name of economic development, as in: Small businesses can hire more people if their taxes are lower. Which is true. Heck, if we eliminate their taxes, they could hire even more people. Until they went out of business because there were no police to keep them from getting robbed, no roads to get their customers to their offices, no schools to produce a literate workforce. But I digress.
The Senate didn’t agree to this tax cut because senators thought it was a good idea — although House leaders were able to point out that the Senate Finance Committee had unanimously approved their stand-alone bill. Which should remind senators how dangerous it is to play political games by voting for bad bills near the end of the legislative session on the assumption that it’s too late for them to go anywhere.
No, the Senate caved because the House was holding a gun to its head. Or worse. Imagine a father holding a gun to his baby’s head to force the mother to gve in to his demands. The mother’s only options are to engage in a game of chicken — put a knife to the child’s throat and hope that will make him put away the gun — or give in. Of course the former is lunacy, so unless she’s as single-mindedly cold-blooded and selfish as the father, the mother gives in.
That was the House’s strategy for the tax cut — and it’s the clearest example we’ve seen since the surreptitious legalization of video gambling and the passage of a bribery-tainted retroactive tax break of why House and Senate leaders were so wise to agree a decade ago to abandon the practice of attaching permanent state law to the annual budget bill. Whether you call it bobtailing, logrolling, a bad-faith invitation to bad lawmaking or just plain extortion, this is an anti-democratic tactic that puts responsible lawmakers at tremendous disadvantage.
It became particularly dangerous in the 1980s and 1990s, as the number of permanent provisos skyrocketed and legislators became so overwhelmed — for a while there, our most important and controversial laws were being made as part of the budget bill — that the less scrupulous among them were able to sneak disastrous measures into law without anyone noticing.
Senators take great pride in their refusal to attach this year’s tax cut to the budget bill. But the fact is that their chosen alternative — attaching it to the continuing budget resolution that kept the government operating until the regular budget could be passed and take effect — was at best a distinction without a difference. At best.
Because of the timing, the stakes were actually higher than I’ve seen in a quarter century of Legislative chicken: There were mere hours to spare when senators were told to swallow the House’s unvetted, unjustified tax cut, or else the House would pull the trigger on the first state government shut-down that anyone can recall.
Given the leverage they had, perhaps we should be relieved that representatives were demanding only $60 million in ransom. Annually.
Ms. Scoppe can be reached at email@example.com.