| The
Warner tax plan: better on marketing than economics
Related
link:
- Warner’s tax reform:
two steps forward
by Chris Edwards
For Virginia Business
January 2004
Gov.
Mark Warner has proposed a major overhaul of Virginia’s
tax structure promising “modernization,”
“fairness” and a tax cut for most families.
Unfortunately,
Warner appears to have spent more time designing the
marketing of the plan than thinking about the actual
economics of tax reform.
Indeed, it seems that the main goal is simply to raise
another $1 billion from Virginians with the minimum
of political pain. To that end, the governor put so
many moving parts into his package that people will
have a tough time figuring out whether their taxes would
go up or down. His plan would raise the top income tax
rate, cut taxes for those with modest incomes, increase
corporate taxes, raise the general sales tax, cut the
sales tax on food and hike cigarette taxes.
One theme in Warner’s plan is to sock it to the
rich, corporations and smokers because that makes for
good public relations. Indeed, smokers are considered
such second-class citizens these days that the governor
excludes the cigarette tax increase in his analysis
showing that most people would get tax cuts. If you
add back in the cigarette tax hike, most Virginians
wouldn’t find the plan fair at all.
The tax plan’s marketing is at odds with its actual
impact in other ways. The governor says that his plan
would “strengthen Virginia’s economic competitiveness
and ability to create jobs.” But the governor’s
plan would suck an additional $1 billion out of the
private sector through higher taxes — out of the
hands of workers, savers, businesses and entrepreneurs.
Those are the folks that create jobs and growth, and
they would have $1 billion less to do so.
Warner’s claim that his plan would “modernize”
the state’s tax system is also just marketing
spin. A key factor ignored in his plan is the heightened
mobility of capital and labor in the modern economy.
When state tax rates rise, state tax bases and economies
shrink. Worse, Warner’s plan would increase taxes
on the most mobile bases — corporations and individuals
with higher incomes. Why tarnish Virginia’s reputation
as a great place for new businesses and high-income
technology workers?
Raising state taxes on corporations is particular counterproductive.
Warner says that corporations “increasingly exploit
our tax system through loopholes.” It is true
those corporate profits are more mobile than ever, and
that firms invest much effort into cutting their state
tax burdens. But raising taxes and adding more complex
rules would just aggravate the high compliance costs
of the corporate tax, which raises less than 5 percent
of Virginia’s tax revenue. Rather than raising
corporate taxes, Virginia ought to eliminate its corporate
tax, which after all is just a hidden burden on individuals
by way of reduced wages, higher prices and lower investment
returns. To balance the modest revenue losses, business
subsidies could be cut. That way, Virginia would spur
growth in all industries rather than dishing out subsidies
and tax loopholes just to favored businesses.
Perhaps some Warner supporters might concede some of
the troublesome economics of the tax plan, but would
support it nonetheless because they agree with the governor
that the current system puts “an unfair burden
on low- and middle-income families.” However,
if one reads between the lines in the Warner administration’s
analysis of “typical” families released
with the tax plan, it is higher-income families that
pay a disproportionate tax burden. A married couple
at $30,000 currently pays 2.9 percent of income in Virginia
income taxes; a married couple at $60,000 pays 3.4 percent;
and a married couple at $175,000 pays 4.6 percent. Yet
Warner’s plan would hike income taxes on the group
that already pays the most. That’s unfair.
Warner’s justification for a large tax increase
is that he has done all he can on spending restraint
to close the budget deficit. He says that he has “eliminated
more than 50 agencies, boards, and commissions.”
But I’d bet most Virginians didn’t notice
the disappearance of a single one of those agencies,
suggesting that there is still more fat to cut in Richmond.
Chris
Edwards is director of fiscal policy at the Cato Institute,
a nonprofit public policy research foundation in Washington,
D.C. He lives in Fairfax County.
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