Sunday, March 30, 2008
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Let’s talk about tax

In an election year, nothing is sexier than taxes—except, maybe, not paying them

What’s the diff?

Flat tax—Taxes everyone’s income at the same rate, regardless of how much money they earn.

Fair tax—Abolishes income tax altogether and institutes more sales tax to make up for the lost income taxes.

By Josh Clark

The other Georgia (you know, the former Soviet state) gave it a shot, so why not this Georgia?

In January 2005, the Eurasian nation of Georgia replaced its former progressive tax, which sucked up to 20 percent of income above 600 laries from taxpayers, with a flat tax of 12 percent on everybody’s income.

Georgia is one of 11 post-Soviet Eastern European and Central Asian states—including Russia—that scrapped their former income tax systems and replaced them with national flat tax systems during the past decade. Kuwait and tiny Mauritius joined in the fun, too. And with 10 years of road tests under its belt, the flat tax has shown it can work. The Hoover Institute, a think tank at Stanford University, reports that Estonia, which instituted a flat tax in 1994, has been operating at a budget surplus since 2001.

It’s ironic that former communist Soviet satellites, and mother Russia herself, have taken up a cause first given voice in a 1981 editorial in the Wall Street Journal. Reagan loved the flat tax idea, and it gathered some steam before the first President Bush and Bill Clinton began adding more income brackets, rather than replacing them with just one. But as the proving ground of Eastern Europe makes the flat tax look doable, some have been thinking about importing it back to the States.

Why not? Some states have already thrown out their progressive tax system, which raises the rate of taxation as a taxpayer’s income rises, in favor of a flat tax. According to the Hoover Institute, before 2006, six states maintained flat-rate income taxes: Colorado (4.63 percent), Illinois (3.0 percent), Indiana (3.4 percent), Massachusetts (5.3 percent), Michigan (3.07 percent), and Pennsylvania (3.07 percent). Last year, Rhode Island and Utah adopted optional flat taxes of 5.5 and 5.35 percent, respectively..

Georgia, too, has come close to flattening income tax, with new legislation popping up occasionally but ultimately dying. A poll by the University of Georgia conducted in 1996, the year billionaire Steve Forbes ran on a flat-tax platform, found that half of the voters in Georgia then favored a federal flat tax.

 Is the fair tax fair?

If the flat tax is solid and steady Hutch, the fair tax is flashy Starsky. With the likes of libertarian shock jock Neil Boortz touting the virtues of the fair tax to talking-point junkies around the nation, the tax reform plan has taken on rock star status among the Christian music set, Minutemen and people with money.

But it also appeals to a much broader audience, because it calls for a complete dismantling of the IRS—and we all love to hate the IRS, right? (In taxpayers’ fantasies, this dismantling would come with the rough physical ejection of IRS agents from their former offices.)

But who would collect the taxes? What taxes? On the federal level, the fair tax calls for the abolishment of income taxes. Other taxes levied against Americans would be discontinued as well. Instead, we would pay for public services and infrastructure with revenues from a bulky sales tax of 23 to 30 percent.

The fair tax also scores points with folks who are sick of deadbeats. With a hefty sales tax supporting the country, perennial sponges like drug dealers, as well as groups perceived as sponges, such as illegal immigrants and panhandlers, would pony up at the register like everybody else. So there wouldn’t be anymore finger-pointing and accusations about who’s not paying their way.

Seems pretty straightforward—the flat tax taxes income at a single rate and the fair tax jettisons income taxes altogether—but the line between flat tax and fair tax can get blurry. Georgia House Resolution 900, a state fair tax plan proposed in 2007 by Speaker Glenn Richardson, stuck the label “fair tax” on a flat tax. The measure would have repealed just about any tax Georgians pay and replaced them with a flat income tax. By definition, a fair tax is a flat tax—after all, income is being taxed zero percent across the board, so that’s a flat rate.

The difference is mainly where the tax is levied. Fair tax proposals usually increase taxes at the checkout line, making them consumption taxes. Anything that consumers pay for is taxed, so the more you buy or the more expensive the item, the more taxes you pay. Flat taxes generally are taxes on income, like the income taxes you’ll have to pay the government by April 15, but they’re fixed at a certain percentage and are the same for everyone, regardless of how much money they make. A flat tax is still progressive in a way; 20 percent of $100,000 is a lot more than 20 percent of $30,000.

How should Georgia tax you?

So which one will it be, Georgia? Fair tax? Flat tax?

“The fair tax or the flat tax aren’t going to happen this year,” sighs Rep. Steve Davis, a state legislator from McDonough.

As far as the fair tax is concerned, Davis could be called a true believer. Two years ago, he submitted his own version of a fair tax for Georgia, as did several of his colleagues in the General Assembly. The Department of Audit, the body responsible for crunching the numbers on tax and appropriations bills presented by legislators, returned an estimate that Davis’ bill would create a deficit for the state in the neighborhood of $3 billion. Davis was undeterred, and considered the office’s figures to be on the liberal side. He remains optimistic that some major tax reform will be forthcoming.
    
“The good news is, we’re all talking about lowering taxes,” he says.

That’s true. In the hallowed halls under the Gold Dome, legislators have been atwitter at the thought of passing any tax reform. With an election year upon us, the country deep into the red, the session winding down to its close as The Sunday Paper goes to press, and tax day rapidly approaching, House Republicans would like to get something done about taxes. That something has so far taken the form of a bill aimed at repealing the annual ad valorem tax on car tags.

Earlier this year, Speaker Richardson pushed a plan to do away with all property taxes of any stripe—on car tags, homes, boats, any physical thing that Georgians are taxed for owning. The downside of the plan was that schools would have lost some dependable tax revenue, so Richardson was hard-pressed to find anyone with a kid in a pubic school to support it. After nine months, and with the session coming to a close, Richardson abandoned his plan and went with another, that of fellow Republican Rep. Mark Burkhalter. Burkhalter, from the newly-minted town of John’s Creek, was offering to repeal the “birthday tax,” the money you pay to renew your car title by your birthday each year.

Richardson got behind Burkhalter’s bill and the House passed it. Much to Gov. Sonny Perdue’s chagrin.

“The speaker couldn’t get the consensus he needed and we [House Republicans] went with what we could get done,” says Davis. Neither Burkhalter nor Richardson responded to interview requests for this article by press time on the day the session was scheduled to close (but probably wouldn’t).

Davis points out that the Democrats in the House weren’t exactly opposed to the measure. “Everyone hates the car tag tax,” he says. “The vote was 166 to 5. I don’t like to tell you this, but there aren’t 166 Republicans in the House.”

If the House succeeds in getting the ad valorem tax repeal past the Senate, one will be hard-pressed to find a Georgian who isn’t at least a little happy about not having to cough up money for a car tag on his or her birthday. And yet, The Sunday Paper managed to find one.

Alan Essig is the executive director of the Georgia Budget and Policy Institute, a nonprofit watchdog group that keeps an eye on the Georgia legislature. He’s not so hip on the idea of repealing the ad valorem tax.

“What they’re doing isn’t tax policy, it’s pandering in an election year,” Essig says. “The politicians are acting like used car salesmen. They’re trying to sell Georgians a free lunch. That’s not good statesmanship.”

An op-ed piece that made the circuit of Georgia newspapers in early March discussed the economic benefits of putting money back into the pockets of Georgians, especially on their birthdays. The logic went that if people didn’t have to send a check to the state to renew their tags, they would have a little more disposable income. And on an occasion for celebration—their birthday—they would be more likely to spend it. With that money spent, the economy would be stimulated regularly, since there are 6 million Georgians and only 365 days. A healthy economy equals more sales tax revenue for the state, and thus everybody wins.

Essig says this economic theory works within a federal scope, but not at the state level. This is chiefly due to the fact that state governments are constitutionally required to hammer together a balanced budget.

“The federal government can go into debt, so it can stimulate the economy by issuing tax rebates,” says Essig. “States can’t go into debt. So a dollar we give back is a dollar we don’t spend on things like pens for teachers.”

And with a projected $672 million annual shortfall from a repeal of the car tag/ad valorem tax, that could add up to a sizable deficit of pens.

This kind of thinking isn’t new to Georgia, Essig says. Our state is 51st (including D.C.) in per capita state and local revenues, and 49th in per capita spending. That means that Georgia has low taxes, less money coming into government coffers and less spent on things like schools, infrastructure and transit compared to other states. “One reason we under-spend on health care and our transit system is terrible is because we don’t invest in these things,” says Essig.

Don’t mess with Georgia

Senate Democrat Emanuel Jones couldn’t agree more. The senator from Ellenwood says that the General Assembly has been working on “fringe” tax proposals, to the potential detriment of the state’s finances.

“Georgia has a triple-A credit rating,” says Jones. “Why anyone would tamper with that really dumbfounds me.”

The credit rating Jones refers to reflects how the state is viewed by bond issuers. They rate states on their financial stability, which affects how likely and how quickly they are expected to repay bonds issued to them. When Georgia wants to build new roads, for example, it has to raise money. So it borrows from bond issuers. The better the bond rating, the less interest the state pays. Georgia has the highest possible rating—AAA—which means taxpayers in Georgia spend less money on road projects than taxpayers in California, which has one of the worst bond ratings in the nation, A+.

Essig says that one of the things bond issuers look at when rating a state borrower is dependable revenue streams. One of those streams has traditionally been the ad valorem tax collected from Georgians each year. So a loss of the tax could mean more money for Georgians in the short-term, but less money in the long run.

“A better way would have been to repeal the ad valorem tax and slap it onto the cigarette tax,” Essig says. “That way you’d have taken a very unpopular tax and applied to something worthwhile, instead of just doing away with it. That would be responsible tax policy.”

Rep. Davis says that there shouldn’t be much surprise from the more liberal quarters of the state over the proposed repeal of the ad valorem. “This is a Republican principle,” he says. “We are doing what we told people we would do: cutting taxes and decreasing government.” He points out that under Republican control, the shortfall for education funding in the state went from $300 million five years ago to $50 million in this year’s budget.

“Nationally, we rank ninth in the nation for education funding, and we’re increasing funding for education every year,” says Davis. And the bond rating, he points out, was AAA even when the budget was only 30 percent of what it is today.

Ultimately, Davis concedes that the current state squabble comes down to textbook politics between Republicans and Democrats. Republicans tend to support supply-side economics, which at its most basic means that the less money government takes, the more money citizens will have to spend as they see fit, and their spending will stimulate the whole economy. Democrats, on the other hand, believe that it’s citizens’ responsibility to pay the government for many of the services that make our country livable, including services for the poor, the sick, the elderly and the disabled, through taxes. But with each party pushing against one another from either side so vigorously, it will be, as always, the workers of the middle class who get squeezed. SP

Where they stand

Of the three presidential front runners, only Republican Sen. John McCain actually lists “Taxes” under the “Issues” he emphasizes on his Web site. The full heading is “Taxes and Economics,” and once you click on it, the “McCain Tax Cut Plan,” an eight-part agenda with 19 bullet points, opens.

Democrat Sen. Barack Obama lists “Economy” under “Issues,” where “Provide Middle Class Americans Tax Relief” is shown under “At a Glance.” A click on that takes visitors to two bullet points: “Provide a Tax Cut for Working Families” and “Simplify Tax Filings for Middle Class Americans.”

Sen. Hillary Clinton lists “Strengthening the Middle Class” under her “Issues.” A click on that link opens a nine-point plan to “restore the American middle class.” The first bullet point is “Lowering taxes for middle class families”—but that’s the last time you’ll see the word “taxes.” Click on the link, and taxes are not mentioned under “Hillary Clinton’s Economic Blueprint for the 21st Century.” SP—Stephanie Ramage

Barack Obama

“Mr. Obama would …[give] substantial permanent tax relief to seniors and working people—up to $1,000 per working family—to help Americans who are struggling in this economy.”—Austan Goolsbee, senior economic adviser to Sen. Barack Obama's campaign, Dallas Morning News, March 27

“The ‘Making Work Pay’ tax credit will completely eliminate income taxes for 10 million Americans. … Obama will ensure that the IRS uses the information it already gets from banks and employers to give taxpayers the option of pre-filled tax forms to verify, sign and return.”—The Obama campaign,  www.barackobama.com

Hillary Clinton

NICHOLAS KAMM/AFP/Getty Images
“Clinton would end tax cuts for people earning over $250,000 and implement tax rebates for working families and senior citizens.”—The Clinton campaign,  www.hillaryclinton.com

 “Clinton … proposes credits and deductions targeting specific groups or activities. She offers a $3,000 ‘caregivers [tax] credit’ to offset the cost of caring for an elderly or disabled relative, a refundable credit ‘to make health care affordable,’ and a $1,000 credit for people who save in a retirement account.”—Bloomberg News, March 13

John McCain

“The alternative minimum tax is obviously eating Americans alive, and it’s got to be repealed. Another one I think is important is a $3,000 tax credit … so low-income Americans will have access to health care… and a simpler, flatter, fair tax so that Americans don't have to spend $140 billion to prepare their tax returns.”—McCain, MSNBC GOP primary debate, May 3, 2007

“John McCain has always believed in the power of the American people, and the importance of keeping marginal tax rates low. But, tax cuts work best when accompanied by lower spending. …Intelligently formulated tax cuts and sensible tax reform will deliver much higher growth when they are accompanied by lower spending.”—The McCain campaign,  www.johnmccain.com