Public Policy Foundation Weighs-In On What Tax Reform Plan Should Look Like

11/28/07) The Georgia Public Policy Foundation, a free-market think tank that has been largely silent so far on Speaker Glenn Richardson’s tax reform plan, is breaking its silence with some thoughts on how the tax change ought to look.

The Speaker’s plan calls for replacing most property taxes in Georgia with an enhanced sales tax, under which many services that are not presently taxed would be made subject to the levy. It has been highly controversial with many city, county and school officials, who rely on the property tax as their man source of funds.

Since first outlining the plan, Richardson also has said he may scale it back so that it eliminates only school property taxes and leaves city and county property taxes intact.

The foundation offered its thoughts in a commentary released yesterday by the group’s vice president, Kelly McCutchen. Some key points:

* An expanded sales tax is okay so long as it’s only applied at the point of final sale to consumers. Otherwise, he argues, it’s essentially a gross receipts tax.

* Spending controls are essential. At the state level, new income from an expanded sales tax should be used either to reduce state income taxes or to increase the state’s share of education funding. At the local level, elected officials should be free to choose whether to eliminate any property taxes that remain once the tax plan is passed or keep a mix of property taxes and sales taxes. But they should also face spending limits keyed to local population and inflation growth, and be required to hold a referendum in order to exceed those limits.

(Richardson indicated in a Columbia County speech on Tuesday that he's considering spending limits of that sort. Here is a link to that story.)

You will find the text of McCutchen's commentary below:

Missing From the Tax Debate: Spending

By Kelly McCutchen

Like love and marriage, tax and spending go together like the proverbial horse and carriage. Absent spending controls, any major “reform” proposal in Georgia’s tax code – particularly a shift in revenues among different levels of government – becomes a masquerade that would increase the size of government. The American tradition of limited government cries out that you can’t have one without the other: Fiscal reform requires spending controls and transparency.

Tax reform in Georgia initially focused on education and has returned there. The state faces a lawsuit that alleges Georgia’s property tax-based system to pay for local education spending is inequitable and unconstitutional. In similar lawsuits across the nation, the response has been to increase funding from the state. The question then becomes, “Which tax do you raise to fund that increase?”

A consumption tax, such as the sales tax, has many advantages over income and property taxes because it does not tax Georgians’ savings and investment. If the state imposes a sales tax on previously untaxed services, it would make the tax fairer and more economically neutral. That applies particularly if refundable tax credits are made available to low-income citizens to offset the regressive aspects of the sales tax.

Economists generally agree that broadening the tax base and lowering tax rates is good economic policy, but that a retail sales tax should only be applied at the final sale to the consumer. Otherwise, you have the equivalent of a gross receipts tax, which the Tax Foundation, a Washington-based tax research organization, has declared “among the most economically harmful tax structures available to lawmakers.”

The tricky question is how one distributes the new sales tax revenue. Under a broader sales tax, 60 percent of the new revenue will flow to the state and the remainder will flow to cities, counties and school districts that currently levy a local sales tax. State government’s intent with its 60 percent share is precisely what has raised concerns about loss of local control. By using the new revenue to reduce state income tax rates or increase the state’s share of education funding, the state eliminates nearly all of these concerns.

Taxpayers need reassurance, however, that the additional local revenue will be dedicated to rolling back tax rates instead of fueling higher spending. As in the famous Reagan adage, “Trust, but verify.” Residents should trust local elected officials to prioritize local spending, and should give them more flexibility. To that end, eliminate arbitrary state requirements that restrict sales taxes to capital projects and cap sales tax rates. In return, limit annual local spending increases to the growth in the local population and inflation. Local governments that wish to exceed this benchmark would seek permission from residents through majority vote in a local referendum. This referendum would be no different from a sales tax election, except the referendum must be held in conjunction with other regularly scheduled elections.

Flexibility in exchange for accountability gives every local community the opportunity to decide for itself if it wishes to eliminate property taxes. If governments prefer a mix of property tax and sales tax, taxpayers would have the reassurance that the process won’t lead to bigger government without citizens having a voice in it. School boards dissatisfied with education funding decisions from state government would be empowered with the independence to fund their own priorities through local decisions.

No longer will Georgians hear complaints of “stealth tax increases.” You can play smoke and mirrors with property tax assessments, but you can’t hide overall spending. It’s been shown numerous times that when local communities must approve a sales tax to finance large capital projects, the public vote leads to better buy-in for approved projects and stops poorly planned or low-priority projects. If Georgia has to increase state taxes, the sales tax is the lesser of evils. Broadening the tax base and reducing tax rates, whether property tax millage rates or income tax rates, is good tax policy.

Before that happens, however, the state must prove to taxpayers that this is a tax shift, not a tax increase. One simple requirement ensures that: a referendum to approve excessive spending. This process preserves local control, enhances transparency and maintains the long-held belief in the principle of limited government. When a debate over tax reform produces a broader, more flexible revenue base with lower rates, more transparency, and taxpayer support for large increases in spending, then all Georgians come out winners.

Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.