RALEIGH – When trying to make sense of debates in Raleigh about government budgeting and tax reform, there are some general rules that can help with interpretation. First, assume that whenever you hear talk about “broadening the revenue base,” the real goal is to narrow the revenue base. Second, assume that whenever you hear talk about “making tough decisions” the real goal is to make easy decisions and then pretend they’re not.
The first rule is widely evident in North Carolina policy debates. For years, local officials fearful of enacting unpopular increases in property tax and state officials fearful of enacting unpopular increases in income tax have sought legislative authority to use alternatives. These include sales taxes, real-estate transfer taxes, local gas taxes, and impact fees. In all but the first case, the real tax-policy effect would be to narrow the population of taxpayers responsible for financing whatever government services the advocates want to maintain or expand.
And even in the sales-tax case, the tax base is more narrow than is commonly believed – because so many consumer purchases, primarily services, are improperly exempt from the current tax, and because even a properly structured sales tax would exclude services purchased by business, including large swaths of legal, advertising, and financial services.
Property and income taxes are the most unpopular forms of taxation precisely because of the characteristics that make them superior revenue sources to most alternatives. For one thing, they are transparent to a large number of taxpayers. Property owners receive an annual tax bill. Older homeowners really feel the pain because they are past their escrow years and write significant, often four-figure checks to local governments out of their personal funds. With regard to income taxes, there is an annual bill, as well, though the government calls it a tax return and encourages taxpayers to think they’ve “won” when they get a refund of the interest-free loan they’ve extended to the government.
Both property and income taxes would benefit from greater transparency. A major benefit would be for taxpayers to come to appreciate how truly broad the base of each tax is – and how the base might be broadened still further, at great net benefit. For example, contrary to myth, renters pay property taxes. They don’t get a bill, but their rents cover the cost of the tax bill the landlord pays. When taxes go up, rent goes up (not immediately, of course, as contracts make rents sticky). A good reform would be to formalize the arrangement with an apartment tax, collected by landlords on a monthly basis and remitted in lieu of property tax.
With income taxation, transparency suffers when governments use the fiction of “corporate-income tax” to mask what is really another layer of tax on the incomes of shareholders, employees, and customers of corporate forms of business. Withholding is also a problem, in that it contributes to the bizarre perception that a tax refund is good news. A move that would both broaden the tax base and promote more transparency would be to limit the tax exclusion for employer-provided health insurance, which creates a host of problems and leads some workers to underestimate their compensation.
The second rule of fiscal policy – that politicians often talk about “tough decisions” to camouflage their resort to easy ones – can best be seen in the case of the state-run lottery. For years, advocates said they regretted the necessary of enacting a government gambling enterprise, understood its potential drawbacks, and recognized that lottery opponents were well organized and passionate. But, they said, it was time to make the tough call.
It was, of course, nothing of the sort. It was the easy way out of the box the politicians had constructed around themselves. They had promised lots of new spending on education, but worried that the general public would not accept broad-based taxes to pay for it. So they chose the popular alternative: make the suckers pay.
What is the result? My JLF colleagues recently took a look at North Carolina per-capita lottery revenues by county. The median counties, Forsyth and Harnett, were at $88 per person. Nash had the highest collection, at $171. Madison was the lowest, at $22. Virtually all the high-lottery-revenue counties are in eastern North Carolina. Most are relatively poor and contain significant minority populations. Virtually all of the low-lottery-revenue counties are in western North Carolina, and contain few minorities. The wealthier urban counties were also below the median, with Buncombe (70th), Orange (76th), and Mecklenburg (77th) particularly low.
The lottery didn’t “expand the revenue base.” And its creation didn’t constitute tough decisionmaking. It was a means of shifting the revenue burden to a narrower base of taxpayers from disproportionately poor communities. There is nothing whatever to be proud of, here.
Hood is president of the John Locke Foundation.