Sunday, Jan. 11, 2009

Overhaul of tax system cannot wait another year

THIS YEAR’S state budget already has been cut from $7 billion to $6 billion and might have to be cut more; things look even worse for the 2009-10 budget lawmakers have already started crafting. Cuts of this magnitude would be difficult enough in a government (or business, or family) that did everything it needed to do; they are magnified in ours, which already fell far short of meeting our state’s basic needs.

Although a few lawmakers relish the idea of making massive cuts to government spending, most realize that with the size of the cuts, their options largely will be between bad choices and worse ones. The result is that most legislators return to Columbia Tuesday to convene the 2009 General Assembly in hunker-down mode, fixated on cobbling together a budget that does as little long-term damage as possible to our state.

The temptation is great to push all other fiscal matters not just to the back burner, but off the stove.

That would be a monumental mistake.

Yes, legislators must focus on the immediate problem. But that immediate and growing problem actually increases the urgency of overhauling our tax system. As economists have noted, the way we tax has plunged our state into far deeper crisis than the recession alone would have. And if that isn’t fixed, we will remain in fiscal crisis much longer than we must — and remain more susceptible to future crises.

The most obvious problem is that we rely too heavily on the sales tax, the most volatile of the major taxes. Unlike the income and property taxes, which grow at a fairly constant rate, sales tax collections shoot up in a go-go consumer economy and crash in recession. Combine that with more than half a billion dollars worth of tax cuts over the past three years, and you understand why tax collections were coming up a billion dollars short even before the recession really hit us.

The instability is exacerbated by our loophole-crazy Legislature. We have so many sales tax loopholes that fully half of the products we purchase are exempt; in other words, we could cut the tax rate in half and still collect the same amount of money if we taxed all purchases. Some exemptions (groceries, for example) make sense, even if they hurt particularly badly in recessions, but others defy logic — with that $300 cap on the automobile sales tax leading the way. The property and income tax codes are likewise loaded down with special exemptions, and we’re relying way too heavily on all those government fees that have been increased or added on each year, usually without public notice.

Our amalgam of taxes not only produces wild fluctuations in income but works at cross-purposes and gives special preferences to those who can afford to maintain a stable of lobbyists (or even individuals who have a special relationship with a special legislator), often subsidizing actions that are detrimental to our state while overtaxing, and thus discouraging, actions that would help us all.

There is no question that tackling this monstrosity will be difficult — more this year than in a normal year. That’s why a growing chorus of business and civic leaders is calling for the creation of an independent panel, whose recommendations lawmakers would have to accept or reject as a package. That is not the ideal solution, but the ideal solution (the Legislature doing the job itself) has been so elusive for so many decades that lawmakers should create such a commission — immediately — even if they plan to tackle the job themselves. We simply cannot afford to wait any longer.

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