Base Tax Reform on Principles, Not Interests

By Kelly McCutchen

State and local governments operate in a cycle of feast or famine. With projections of surging tax revenues for Georgia after one of the toughest downturns in recent history, it’s no surprise that there are myriad tax reform proposals before state legislators.

Before the feeding frenzy begins among the special interests, legislators must hold firm to some basic economics. Fiscal reform shouldn’t emanate from those with the most powerful lobbyists; it should be based upon time-tested and economically sound principles. While there may be justifiable exceptions, it should take compelling evidence to break the following principles:

Minimize the impact of taxes on economic growth. Relative to most states, Georgia’s overall economy is thriving. We need to keep it that way, by watching not only the level of taxation but the type of taxation. Some taxes are more of a hurdle to economic growth than others. The income tax is one example.

Uphold the principle of limited government by minimizing the tax burden. Taxes are necessary to fund core government services, but mission creep and inefficiency can quickly bloat government beyond what is necessary or appropriate. Government needs to be reminded that an additional dollar of taxes is a discretionary dollar taken away from a family. A decision to raise taxes is an explicit decision that a government program has a higher priority than these individual decisions.

Avoid picking winners and losers. Tax policy should not single out individuals, businesses or particular groups for preferential treatment. Taxes should be designed to raise revenue to fund necessary government programs, not to micromanage economic decisions in a complex economy.

Limit exemptions to encourage a broad tax base and low rates. Exemptions shift the tax burden onto others and high tax rates distort economic decision-making. Everyone who is financially able should pay some tax to support the necessary services they receive from government. Voting to grow government spending is easy if you don’t have to pay for it.

Ensure taxes are visible and only paid once. Taxes should not be hidden in business transactions. For example, the ideal tax base for the sales tax is all goods and services at the point of sale to the end user.

Encourage simplicity and stability. Complex tax codes increase compliance and enforcement costs and encourage tax avoidance schemes. Tax changes should be permanent and not temporary or retroactive.

Unfortunately, principles are not enough. In a growing economy, tax burdens can rise dramatically even without explicit tax increases. Georgia is a textbook example.

From 1981 to 2002 Georgia experienced “dramatic growth in taxes per capita adjusted for inflation,” according to Peter Bluestone at Georgia State University. During this period, real state and local taxation per capita grew by 67 percent, with the growth of local government taxation more than doubling that of the state.

Georgia is no longer a low-tax state. The Tax Foundation has been ranking state tax burdens since 1970. Georgia has moved from the ninth-lowest tax burden in 1970 to this year’s ranking of 25th highest in the country. Given this long-term trend of higher taxes, where will we be in 10 or 20 years if we do nothing? Now is the time to ensure that our children and grandchildren will have the same economic opportunities we have enjoyed.

Abiding by tax reform principles is helpful, but the best, most fiscally responsible way to limit taxation is to limit spending. University of Georgia economist Jeffrey H. Dorfman had it right in a guest editorial appearing in the Atlanta Journal-Constitution recently. “Instead of concocting complicated systems of awarding tax breaks to favored classes of citizens, let’s limit government spending,” he said.

A limit on state and local spending is critical to tax reform. Many proposed tax reforms involve a shift from one tax to another, a shift from local to state government, or both. Just last year, it was a proposal to shift education funding from local property taxes to a state sales tax.

Even though these shifts are always marketed as “revenue neutral,” how are taxpayers assured that they won’t be left with a major tax increase if the projections are wrong? How many times have we seen local millage rates rolled back after a local sales tax increase, only to see them creep back to their original level several years later?

A spending limit would ensure that “excess revenues” (overpayments) are refunded back to taxpayers rather than spent. Without such assurances, it is politically unlikely that such reforms will pass.

Georgia can be the most fiscally sound state in the nation by adopting principled tax reforms and a state and local spending limit. An important election is just around the corner. Let’s make sure Georgia’s future leaders put policy over politics.

      Georgia’s Historical Tax Burden Rank (State and Local Taxes Per Capita)

Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (September 29, 2006). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.