Solutions offered to the problem of high state taxes as discussed in a prior article
In my prior article I set forth the problem of excessive taxation in the states and focused on the State of Maine to highlight the issue. Anyone can point out the problems; the difficulty is offering good and thoughtful solutions. The framework for solution is set forth here. Hopefully a constructive discussion will be sparked.
Often tax rates are set, but there are many loopholes, called exemptions, and tax incentive programs. Some of the programs are to entice businesses to enter to state. Others are used to encourage certain conduct (for example, exempting a business from taxes on the purchase of certain equipment so the business will expand). The problem occurs when the programs are not monitored and it is unknown if the state is getting the “bang for its buck.” Such programs could actually lead to a higher tax burden.
How so? The business equipment exemption, for example, may result in a significant loss in revenue without the hoped for expansion and job creation. This creates the need for the state to find other sources of revenue which may be increased taxes in other areas. With proper oversight and periodic evaluation the tax incentive program can be reviewed to ensure it is serving the purpose for which it was designed and providing the anticipated revenue.
Tax reform, to be truly broad based and long lasting, requires courage and a bold plan. In the typical state legislature there is a taxation committee tasked with examining legislation proposed by the governor or other legislators. The committee can also propose its own legislation. In order to be effective the committee must set ground rules for its own plan of action and, at least initially, everything must be “on the table.”
One area that requires courage is the wholesale slashing of areas of taxation (corporate or sales taxes for example) or of the elimination of the highest tax brackets. Most state legislatures have an office that examines all legislation and will report a “fiscal note.” This fiscal note would explain the loss to the state’s revenue if such legislation was passed. The note might state “last fiscal year the state’s highest corporate tax bracket resulted in revenue to the state in the amount of $100 million. If this bracket is eliminated there will be a corresponding loss of revenue.” The actual benefits are more difficult to analyze and are not reported. The legislature may be tasked with finding a $100 million “shortfall” even though the elimination of the highest bracket may encourage businesses to expand and employ many more employees.
III. Find Savings and Close loopholes
In order to work within this framework (if it cannot be changed to comply with economics) the state must find savings and close loopholes. Savings could be found with the oversight set forth above. For example, if the business equipment program is ineffective in bringing jobs or expansion, but costing $50 million in revenue it could be eliminated. The $50 million is savings could then be used to lower the higher tax brackets.
Second, loopholes must be closed. Some states have sales taxes on certain items, but not others. It creates unfairness in the taxation scheme and such loopholes may be based soley on which group has the better lobbyist. Further, the sales tax may not be broad based enough to provide a stable foundation for state revenue. If it is too narrow then, when those sectors of the economy experience a downturn, the entire state suffers.
IV. Conclusion – keep your eye on the prize
The ultimate goal of tax reform is to lower the overall tax burden for the residents of the state and to generate economic development so that the state has a stable and sustainable source of revenue. This goal can be accomplished with oversight, bold thinking and action which includes rooting out savings and closing loopholes. The initial decisions and action may be difficult but the benefits to the people of the state in a lowering of their tax burden will be well worth the effort.
