Monday, May 07, 2007

The Ugly Side of Tax Reform

Everybody's talking about taxes.

Glenn Richardson wants to abolish practically every tax in the state and replace them with a 5.75% flat income tax and a 5.75% value added tax. I am not as upset about this as most. In the past I have advocated both flat taxes and VATs. However, everyone is missing the point.

You cannot have tax reform without spending reform. We have already seen this battle played out in Washington. Democrats are "tax and spend". Maybe true, but then Republicans are "debt and spend".

The key to every political equation is spend, spend, spend. It is an unavoidable fact that government is expensive and will only grow more expensive. Georgia's budget will increase by over 1.5 billion in 2008. To be fair, a large portion of that is the normal increase in spending to cover inflationary costs however it cannot be avoided it will rise and continue to rise.

Under Georgia's constitution, we are required to have a balanced budget. So what happens if the revenue isn't there? Either we start cutting or we start adding other revenue streams. If we cut, it would be deep. Schools, roads, healthcare. Cuts so deep that no matter the ideology, everyone will feel the pain.

The other option is fees.

Many advocates of tax reform refer to Florida as an example of a state which gets along fine and dandy without an income tax (note Bookman cites the currents tax reform fight in Tallahassee). Two things they never cite are Disney World and impact fees.

Florida's state sales tax is 6%. South of the border, they have the one thing Georgia can never match; 75 to 100 million visitors a year. Visitors who pays gobs of sales tax as well as other fees such as rental car surcharges. In 2005, sales tax alone generated over $3.5 billion. Sound like a big number? That's still only 15% of the Georgia budget. And we don't have Disney World.

Then there are the fees. I had an interesting conversation with my brother last week. He resides near Ocala in central Florida. Last year he began construction on a new house. Before breaking ground he spent over $12,000 in impact fees. Now, for estate purposes, he is attempting to sell some commercial real estate. Only one problem. Current impact fees are preventing even large corporations such as McDonald's from purchasing real estate as the initial investment is too costly

Commercial real estate impact fees in the state of Florida? Over $220,000.

The point is tax reform can be a good and noble effort. But it cannot be haphazard. It cannot be slash and burn. It cannot be a bit of salve here and there to make us all feel better. It must be comprehensive and full of hard choices. And it absolutely must include a discussion of spending and how it can be controlled.

So yes, the Speaker's plan is a little nuts. But in a grand scheme might not be such a bad idea. The problem is the devil is in the details and we have a hard time facing the devil.


rusty said...

I've already written this on my blog, but the thing that makes Richardson's proposal so crazy isn't that it's a regressive tax, but that it shifts all power away from local governments to the state. If you think the DOT is fat and happy now, wait 'til all the local dollars that are being put into MARTA are siphoned out and shoved down its gullet.

griftdrift said...

A good point Rusty. Its similar to problems with federal taxes. We send tax money to DC then it comes back to the state in the form of block grants and funds. Unfortunately along the way, the buearacracy shaves off a little here and little there. Thus we end up with less money then we sent up at the beginning. Would the better solution be to keep the money where it starts?

rusty said...

Yes. I'd like to dissolve large portions of the federal and state governments and keep that money where it came from. I wouldn't cry if the state DOT and education departments were dissolved completely.