Gary Sasse: Is It Time For Truth In Taxation?
Wednesday, September 25, 2013
In making tax policy choices it is incumbent that elected officials fully comprehend the potential impact that tax changes can have on public services, the commerce of the state, and the tax burdens borne by both families and businesses.
To evaluate tax proposals, politicians should provide taxpayers with clear answers to the following basic questions.
1) Who will pay?
2) Will the tax change enhance or diminish the state’s economic growth?
3) Will the tax change produce revenue in a predictable and equitable manner while limiting economic distortions?
4) Will the change facilitate taxpayer understanding and compliance?
While these questions are straight forward, answers to them may not be. Four methods are commonly used to measure tax burdens and gauge their impact on individuals, business, and the overall economy. None are perfect and each may have unique strengths and weaknesses. They include: per capita collections, the ratio of taxes paid to personal income, representative taxpayer models, and after -tax business profits.
In fiscal year 2010 Rhode Islanders per capita state and local tax burden ranked 13th highest in the United States. Even through our per capita tax burden was ten percent above the national average, our per capita sales tax burden was 18% below and individual income tax approximates the average for the 50 states. Our relative high tax burden resulted from over-reliance on property taxes.
Per capita tax collections tell us little about the relationship between tax burdens and a state’s economy or demographics. For example, per capita tax rankings are misleading because the same revenue will result in a lower per capita tax burden if a state is densely populated. Furthermore, this measurement does not take into account taxes collected from non-residents.
A second common measure of tax burden is the relationship of tax collections to personal income. Rhode Island’s tax collection per $1,000 of income is 5.2% above the national average. However, the Ocean State’s tax collection in relation to personal income for sales, income and all other taxes is below the average for the 50 states. As James Carville might say, it’s the property tax stupid!
This benchmark of a state’s tax burden does not tell very much about who is paying the tax. It is entirely possible that a state considered a “low tax state” might in fact be a “high tax state” for middle class families.
According to the liberal Institute on Taxation and Economic Policy, the portion of income paid in taxes by the lowest income Rhode Island families was almost double that of the top one percent of earners. However, the top 1% in Rhode Island pays a larger share of their income in state and local of taxes than do the wealthy in both Massachusetts and Connecticut.
The third approach to evaluate interstate tax burdens is to develop representative tax models. This method calculates estimates of the tax liability for a typical taxpayer or household based on existing tax laws and assumptions about consumption patterns, housing choices, income sources, family size and the like.
A prominent example of a representative tax study is periodically prepared by the District of Columbia Department of Revenue and Finance. This analysis computes the tax burden for households at various income levels in the largest city in each state. For a Providence family earning $75,000, their tax burden ranks 12th highest and for a family with a $150,000 income the ranking was 15th.
Representative taxpayer studies add to our understanding of tax burdens because they focus on “typical taxpayers” and deal with distributional issues. However, this type of analysis is not without its shortcomings. The measurement of relative tax burdens is only as valid as the assumptions used. For example, generalizations between housing values and family income are problematic.
According to the accounting firm Ernst and Young, in fiscal year 2012, business taxes accounted for 43% of all state and local taxes collected in the Ocean State. Thus, in evaluating a state tax system one must consider how tax burdens affect after- tax business profits. In the “Location Matters” report prepared by KPMG and the Tax Foundation, Rhode Island’s business tax structure was found not to compare favorably either from a national or regional perspective.
While our business tax structure gets low marks from national experts, a survey presented by the Fourth Economy Consulting for the Chafee Administration noted that Rhode Island offered 57 tax expenditures supporting economic development at a cost of $461 million. High tax rate for all and tax loopholes for the connected are usually not sound tax policy.
Different measures exist for evaluating state and local tax burdens and policy options. Each has unique strengths and limitations. Some help us make sound tax policy choices and others are not at all helpful. Unless data limitations, measurement goals, and assumptions are well understood more heat than light will be generated when tax policy is being made.
In a future column we will discuss a practical strategic approach to developing a more competitive, balanced and fairer tax structure. It will discuss phasing out the estate tax, reducing business tax rates while closing loopholes, revisiting the income tax rate for those with incomes in excess of a half a million dollars and controlling property tax growth.
Gary Sasse is Founding Director of the Hassenfeld Institute for Public Leadership at Bryant University. He is the former Executive Director Rhode Island Public Expenditure and Director of the Departments of Administration and Revenue.
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