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1. the politics of state taxation

   Brunori Chapter 4
2. introduction Few areas that involve government are more controversial than taxation, primarily because the underlying issues require normative value judgments that defy measurable parameters. The notion that tax law should be constructed to benefit particular groups runs counter to the basic principles of sound tax policy. Rather, tax laws should minimize distinctions between base and tax payer. In many instances, the call for tax relief rings from politically powerful constituencies.
3. The Political Arenas Traditionally, the politics of state taxation have been played out into arenas: At the ballot box Before the legislature Politicians use the legislative process to accomplish many goals. They must satisfy the needs and desires of constituents, particularly their political supporters. Politicians must strive to make the state appear economically competitive relative to other states. Legislators must find the money to pay for the public services demanded by their constituents
4. Electoral Politics and Tax Policy Electoral politics shave tax policy in two important ways. Politicians seeking office typically raise broad issues of state tax policies and commit to addressing those issues while in office Most candidates approaches to tax policy are similar to their public approaches on most policy issues. Elections focus on broad-based issues such as quality of education, crime rates, and the need for improved transportation systems Electoral politics shape tax policy by reinforcing the anti-tax culture that is taken root in the United States. This trend has prevailed at the state and the federal level.
5. Legislative Politics And Tax Policy Legislative tax politics differ significantly from the electoral tax politics in their focus. While electoral tax politics are aimed at broad segments of the voting public, legislative tax politics usually involve a more limited number of individuals. The routine work of the legislature involves proposing in adopting incremental changes to the tax laws. In this regard, taxation is no different from any other public policy issue. Interest groups try to influence legislators to obtain favorable tax treatment. Not surprisingly, the business community usually conducts the most effective and well-financed lobbying efforts. The prevalence of the business lobby – and, more important, it’s demonstrable if efficacy – may not be completely unjustified, however. Some posit that state business taxation relates directly to business outputs, which bear directly on us states economic help. Another factor that influences legislated tax policy is logrolling. Logrolling refers to the exchange of support among legislators
6. Motivations for Legislators Legislators are concerned with getting reelected, furthering their careers, and enhancing their political reach. Legislators actions, whether they benefit political benefactors or are in the public interest, are often guided by ambition. Those groups crucial to a legislators political career can usually count on the legislator to support tax policies that will benefit their interests. Another motivation for legislators. Their political ideology, most often reflected in the legislators party affiliation. One additional legislative consideration in formulating state tax policy is the actions of competitor states. Neighboring states are likely to mirror each other’s tax policies.
7. Pay for Public Services Legislators must raise sufficient revenue to pay for the public services demanded by their constituents. Because most states have strict balanced-budget requirements, legislators must be willing to impose tax burdens on people and businesses that approximately equal the costs of providing those government services – regardless of antitax sentiment and concerns about interstate competition. Legislative tax politics generally involve determining who will pay for those services.
8. Avoid (Broad—based) Taxes if Possible Political leaders in general, and legislators in particular are hesitant to raise broad-based taxes on income, sales, or property. Politicians know that voters preferred lower taxes. Broad-based taxes, by definition, fall on the greatest number of constituents. Political leaders also perceive broad-based taxes as affecting economic growth and job creation. These political realities have led legislators and governors to prefer alternate revenue sources when available.
9. Hide the Tax (or Export It) Political leaders at all levels of government seek to obscure tax burdens by levying taxes that are largely unnoticed by the citizens. Excise taxes and corporate income taxes can sometimes be hidden. Those burdens are often passed on to consumers, who may not realize that the embedded additional cost is the result of government action. The sales tax provides the best example of an easily hidden tax because it is paid in small increments by citizens who are largely unaware of their overall sales tax burden. The desire to obscure tax burdens adds to the regressivity of state tax systems. Another bias exhibited by lawmakers is, whenever possible, to export the tax burden out-of-state to individuals and firms.
10. Fuel Economic Development State legislators generally seek policies that appear to foster economic development. Because of their interest in creating jobs and spurring economic development, state legislators are inclined to opt for tax policies favored by the business community.
11. Favor Regressivity One important aspect of legislative tax politics, and one closely related to the desire to spur economic development, is lawmakers-apparent bias towards regressivity. State legislators have tended to favor reducing progressive taxes, such as personal and corporate income taxes, and raising more regressive taxes, such as consumption taxes. Political science research shows that the wealthier an individual is, the more likely he or she is to vote and to contribute to political campaigns. A second possible reason for the bias towards regressivity is that state legislators believe that reducing income tax burdens will foster economic growth. A third possible explanation for the regressive bias is that legislators do not realize the implications of tax policy choices. Legislators have little specific knowledge of the relative burdens placed on the poor, middle class, and wealthy by a change in tax law. To be sure, legislators generally recognize that income taxes are progressive and the consumption taxes are regressive. Given the politics of who pays and who votes, this limited knowledge might be enough to guide decision-making. Legislators, however, might make different choices if they understood how much tax burdens vary across economic classes.
12. Help the Dispossessed Even policies that ease sales taxes do not necessarily address regressivity. Although political leaders have successfully exempted many necessities from the sales tax, the wealthy and middle-class enjoy the benefits of such exemptions as much as, if not more than, the poor do. Exempting food meant for home consumption also does not necessarily help the poorest segments of society. These individuals likely receive federal food-stamp assistance, which is already exempt from sales tax. Removing taxes from necessities results in greater tax rates for non-exempt items.
13. Implement Social Agendas Often, legislators, social agendas interact with the tax policies. That is, legislators often find ways to use taxation to influence various social mores. If the social policy for particular taxes widely supported, the political cost of increasing the associated tax is much more likely to be low(resulting in a revenue source, with little political cost). If the public widely agrees that certain activities are worthy of condemnation, it is unlikely to oppose increasing the tax burden associated with those activities.
14. The Case of Supermajorities One of the most interesting political developments in recent years concerning legislative tax politics has been the adoption of supermajority requirements for tax increases. Super majority laws require a more than majority vote by the legislature to increase tax burdens. These measures have been adopted in the belief that require a super majority vote will make it more difficult to raise taxes. The undemocratic effects of supermajority requirements are greater than merely hampering tax increases. Most states also allow a simple majority to enact most laws, many of which involve expending state funds. The state may need additional tax revenue to fund programs passed by a democratically elected legislature. It may be difficult, if not impossible to obtain the super majority needed to fund the programs enacted by the majority. What was intended to protect the citizens pocketbook from the rapacious government could end up preventing the enactment of program supported by a majority of those citizens. Super majorities are also criticized for being less than ideal from a tax policy process point of view. Most economists and political theorists by now agree that sound tax policy is built on low rates and a broad base. The latter requires minimal exceptions, deductions, credits, and other loopholes. By closing a loophole constitutes it tax increase, and it requires where appropriate, a super majority of the legislature. Granting a loophole, however, requires simply a majority vote. It is a curious, albeit unintended, result that the supermajority requirements actually make good tax policy harder to achieve
15. Direct Democracy and Tax Policy Every year, hundreds of measures are put to popular vote in the 24 states that allow initiatives and popular referendums. Taxes are the issue most often placed on the ballots for voter approval. Most tax initiatives and referendums seek to limit states’ power to tax. Initiatives and referendums do not necessarily lead to smaller government and tax limitations. One often-mentioned problem is that direct democracy has become dominated by wealthy special interest groups that use the process to bypass state legislators Direct democracy places many of the tax decisions in the hands of a well-meaning, but untrained voting public. More philosophically, direct democracy weakens representative government, the foundation of both our federal and state governments. The greatest limitation of direct democracy, however, is that it requires an up-or-down vote on tax policy majors. Voters must decide to approve or reject a proposal.