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Day 31 - Tax Expenditure Report?

Rep. Mike Morley (R - Spanish Fork) is sponsoring HB89 which requires the legislative fiscal analyst to submit an annual report of state and federal expenditures for financial assistance and services to low-income individuals and families. Click here to read more information about this good bill.

We've been hearing chatter that there will be an attempt to amend HB89 by requiring the state to generate a so-called "tax expenditure report".

What is a tax expenditure report?
Spending groups argue that tax exemptions, credits, deductions, and exclusions are really forms of government expenditures. In other words, if government lets taxpayers keep more of their own money by exempting 45% of a primary residence valuation from property tax, that is no different than if government had charged taxes on 100% of primary residence valuations and had appropriated increase for government programs.

A tax expenditure report would summarize all of the exemptions, credits, deductions, and exclusions and label these as government expenditures.

Is this a good idea?
A list of tax exemptions is not a bad idea. In fact, the Tax Commission already lists sales tax exemptions and reductions to individual income tax base in its annual report.

However, the problem with the "tax expenditure" idea is terminology. State and local tax exemptions are literally worth billions of dollars every year, whether it is the aforementioned 45% residential exemption or the exclusion of medical services from sales taxes or the deductibility of mortgage interest and charitable contributions from income taxes.

While some of these deductions and exemptions are difficult to justify, calling these exemptions a "government expenditure" is problematic. Obviously, letting people keep their own money through deductions is not the same as if government had spent that money, mainly because reductions in tax bases are largely offset by increasing tax rates. Tax rates and tax bases are connected. For example, states that exempt food from sales taxes generally have higher sales tax rates.

Moreover, exemptions and credits allow individuals and businesses the discretion to spend their money how they want, whether it means buying a bigger house and getting a larger property tax break in absolute dollar amounts or spending more on charitable contributions and getting a bigger income tax break (Of course, they could do both). Individual taxpayers would lose this discretion if these exemptions were eliminated and government spent the difference, which could explain some of the motivation behind the tax expenditure report in the first place.

While some of these exemptions negatively distort economic decision making and/or do not promote economic growth as well as an overall rate reduction would, the discretion of taxpayers to spend dollars due to tax exemptions clearly disqualifies these dollars as government expenditures.

We've generally supported broad tax bases (and lower tax rates), but we've never argued that reductions in tax bases are the same as if the state had actually spent these dollars directly in government programs. By lowering tax rates as bases are broadened, taxpayers continue to have the freedom to spend their money as they see fit.

This is really a philosophical debate. Whose money is it: government's or taxpayers'?

Conservatives look at money as belonging to people and then government takes a portion.

Liberals look at money as belonging to government and then government allows people to take a portion.

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