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  • From: "Common Sense Foundation" <leftwich@ibiblio.org>
  • To: common-sense@lists.ibiblio.org
  • Subject: Consider This: Tax Reform, Not Tax Cuts
  • Date: Fri, 12 Dec 2003 16:14:00 -0500 (EST)

Consider This...


TAX REFORM, NOT TAX CUTS


The Republicans did all they could to slash state taxes in the 1990s,
claiming that the government had more money than it needed. Now, in leaner
times, their one-note economic solution is--you guessed it--more tax cuts.

This week?s corporate welfare special session was almost entirely
dedicated to the worship of the tax cut as the one political tool that
state leaders are willing to use to accomplish anything. The single-minded
tax-cut obsession not only rules out many excellent policy ideas, it?s
also downright dangerous for a state government that can barely make ends
meet even before the tax cuts.

What?s needed at this point is tax reform. Perhaps that should begin with
a serious examination of expanding the sales tax to include more services.

Nearly every state taxes some services, many of them (like North Carolina)
mainly utilities. Expanding the range of services covered would finally
acknowledge that the state?s economy has fundamentally and permanently
shifted away from the sale of manufactured and agricultural products and
toward an economy that is increasingly dominated by services.

The sales tax, implemented in most U.S. states during and immediately
after the Great Depression, was originally intended to provide a more
stable source of revenue than did property taxes, the base of which was in
steep decline in the 1930s. Thus the sales tax was a response to a
changing tax base. With the base changing again, another response is
necessary to stabilize revenue and, eventually, pursue a less regressive
tax policy.

In 1982 U.S. households began buying more services than goods, a trend
that does not look like it will reverse anytime soon. Yet the 20% of
American families with the lowest incomes pay 5.9% of their income in
sales taxes, while the wealthiest 1% pay just 1% of their income in sales
taxes. That?s a horribly regressive tax, so an expansion of the sales tax
to cover services would need to address that concern.

The state could tax only certain services, like investment advising or
charter aviation, that are used primarily by the wealthy. Unfortunately,
such an approach wouldn?t raise more than a few million dollars in North
Carolina. A better idea might be to establish a ?floor? for the services
tax (say $400), below which the tax would not apply.

Ohio has just instituted a major expansion of the state sales tax on
services. Many other states tax more services than we do already.

A progressive tax reform would help stabilize, and possibly even increase,
state revenues. Then the General Assembly could concentrate on funding
education and health care instead of corporate welfare.

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  • Consider This: Tax Reform, Not Tax Cuts, Common Sense Foundation, 12/12/2003

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