RALEIGH – So I was reading an editorial in the Raleigh News & Observer about the legislature’s enactment of the 2007-09 state budget when a telling turn of phrase caught my eye.
Discussing the spirited battle this year about whether to allow North Carolina counties to impose a local tax on real-estate transfers, the N&O noted that the legislative outcome was a choice – counties can hold a referendum either to raise their sales-tax rates by .25 percent or impose the .4 percent transfer tax. Because of differences in shopping patterns and local real-estate markets, the revenue implications of each option vary from county to county.
In Wake, the transfer tax is projected to yield $40 million a year while the sales tax will yield about $12 million less. “Given the extent of the needs,” the newspaper opined, “Wake voters might be wise to opt for all the revenue they can get, via the transfer tax.”
All the revenue they can “get”? From whom, exactly? A more appropriate construction would be “all the revenue they can give up.” More appropriate, that is, if you are looking at the matter from the tax-payers’ point of view rather than the tax-spenders point of view.
Now, it is true that the universe of county taxpayers is a bit larger than the universe of county voters. Some of the incidence of a transfer tax on home and land sales will probably be borne by people who reside outside of Wake County, be they sellers, buyers, or persons representing them. But the vast majority of revenue from the new tax will come from current or future Wake residents. The main difference is one of time – property taxes obligate us to pay every year, while transfer taxes essentially store up the equivalent tax obligation to be discharged in a lump sum in the future (by the way, the real cost of that obligation is higher with the transfer tax because, unlike the property tax, it is not deductible from federal taxable income).
The same is true for sales taxes, of course. While some of the tax burden is borne by out-of-town buyers (or sellers), the vast majority of the tax incidence falls on county residents.
No, the editorial’s peculiar phrasing of Wake voters having an interest in “getting” as much revenue from a more-expensive tax cannot really be due to a careful analysis of cross-county money flows. The real explanation is that, to many politicians, spending lobbies, and editorialists of a like mind, taxation is assumed to be a net good. It removes money from people less likely to spend it wisely (i.e. those who earned it) and transfers it to people more likely to spend it wisely (i.e. the political class). The more taxation there is, the more “investment” there is in government programs that benefit most or all of the population.
You don’t have to be a free-market guy like me to recognize that this view of taxation is fraught with peril (though it helps). While some degree of taxation is a net positive, because it finances necessary public services, there is a point of diminishing returns – a point at which whatever benefits might accrue to greater government spending are offset by the benefits of the goods and services that would have purchased with the money taxed away.
Those who think government is too small either don’t believe there is a point of diminishing returns, or believe it lies way off in the future (believing as they do that a tax burden of one-third, roughly the current average figure for taxation at all levels of government, is insufficient to the task). Since the voting public isn’t inclined to agree, these spending lobbies prefer to create a multiplicity of tax options, many of them hidden in fine print or the prices of good and services. That way, voters aren’t really sure how much government costs them, and are less opposed to the next increment of taxation, particularly if they aren’t sure how the new tax will affect them personally.
Another telling moment for me was my service a couple of years ago on a statewide commission examining tax-reform options for North Carolina. I proposed that because properly constructed income and sales taxes have essentially the same tax base, we should just merge the two taxes into one, saving some administrative and compliance costs while giving North Carolinians a clearer sense of their total state tax bill.
“We can’t do that,” said one of my fellow committee members, a powerful state senator. “The tax rate would be something like 10 percent, and the voters would revolt.”
Well, yes. They understand, even if newspaper editorialists do not, that when the tax burden rises, most of them are givers, not getters.
Hood is president of the John Locke Foundation.