Tax reduction, tax reform, and tax simplification are on the agendas of the U.S. Congress and also many states.
The economy and society have changed dramatically in the last few decades, and the tax system needs to keep up.
In Idaho, the Legislature produced some mini-tax reform by voting to take the state sales tax off of food. Now Gov. Butch Otter must decide whether to sign or veto that legislation.
My advice is simple – veto the bill. Eliminating the sales tax on food constricts Idaho’s tax base, exactly the opposite of good tax reform that would broaden the tax base. If the concern is that the food sales tax is regressive (low-income people pay a higher share of income on food than wealthy people), there are much better ways to help poor people.
The sales tax is already in trouble, as burgeoning on-line sales don’t produce as much tax revenue as brick-and-mortar stores (even with Amazon volunteering to collect sales tax). Eliminating the tax on food, costing Idaho some $70 million a year, narrows the tax base even further and could really hurt when the economy slumps. The food tax is reliable. People have to eat. In a downturn, people stop buying other things, but they still buy food.
If Idaho legislators feel the state is flush with cash and a tax cut is needed, then cut the overall rates a bit, but maintain a broad tax base. The goal of revenue-neutral tax reform ought to be broadening the tax base, while lowering the rates.
And, in reality, Idaho’s economy is doing great, but the state is not flush with cash. Not when per-pupil spending is among the lowest in the country and when teacher salaries aren’t high enough to comfortably support a family.
Cutting taxes is always fun and relatively easy. Raising taxes when the economy craters is difficult, almost impossible. And it’s times like those when education funding suffers and Idaho schoolchildren lose critical training for the jobs of the future.
Progressive, pro-growth tax reform is necessary because the outlook for future tax revenue isn’t bright. Economists say that the way the economic structure is changing, tax revenue won’t keep up on a proportional basis. Current tax policy doesn’t reflect realities of the economy. For example, retail sales are increasingly occurring on-line and taxes are not being collected on most of those on-line sales. Brick-and-mortar stores are placed at a significant disadvantage. How will states and local governments make up for that lost revenue? It’s very difficult for states to act alone. Everyone hopes Congress will solve the problem, but there’s little mood in Congress to force retailers to collect taxes for states.
Also, we are becoming much more of a service economy, and service transactions are generally not taxed. A few decades ago, some 70 percent of the economy, as measured by Gross Domestic Product, was taxed in some fashion in most states. Today, only 40 percent of the economy is taxed. Our tax code needs updating. It will soon not support the basic services government must provide.
Finally, some taxes, such as the fuel tax, will become obsolete as more electric vehicles are sold and as other vehicles become more fuel-efficient. New ways to pay for our transportation system will need to be devised. It makes sense to require highway users to pay most of the cost of transportation infrastructure and maintenance. But when the fuel tax, a “user fee,” is eroded away by increased vehicle mileage and electric vehicles, where will the tax revenue come from to maintain good mobility?
These changing economic conditions and their ramifications on taxes need to be carefully studied and solutions need to be found. It’s important to remember a tried-and-true principle: the best tax structure features a broad base, with low rates. A broad-based system prevents any one economic sector from bearing an unfair share of the tax burden. All citizens and businesses benefit from government programs and benefits. All should have some “skin in the game.”
That’s why some economists don’t support eliminating the sales tax on food. Many low-income people receive a variety of government benefits and subsidies. Sometimes the only tax they pay is the sales tax.
Idaho is a conservative state with low taxes and limited government. I’m not suggesting that this approach to governance should ever change. But even conservative legislators recognize that government plays key roles in certain areas, including education. It should do an excellent job in those areas where it plays a role.
Given that Idaho is a pro-family state where children are valued, Idaho should aspire to have the best education and workforce development system in the country. That will require some money.
In this period between legislative sessions, the governor and Legislature should analyze tax reform options and produce a balanced, forward-looking plan that could be addressed in next year’s session.