Taxes Dedicated to Misleading Taxpayers

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With their budgets squeezed by the sharp economic downturn, states and municipalities raised taxes furiously this last budget season. Legislators sold many of these new levies to a beleaguered citizenry as temporary fixes that are to be dedicated to paying for essential services that might otherwise have to be cut in an economic downturn.

But if the past is any prologue, many of these taxes will never go away, even when times get better, and the money from them won't be used for the purposes for which they were designed. Indeed, all you have to do is look at how governments around the country consistently misuse revenues from dedicated taxes and ‘temporary' surcharges passed in previous fiscal squeezes to understand the way taxpayers are regularly misled by their elected officials.

One glaring example of how the legislative bait and switch works are so-called 911 taxes on cell phone users. Many states, counties and cities enacted these taxes to pay for upgrades to their emergency response systems, such as to add technology that allows a 911 operator to identify the precise location of a call from a cell phone. But in the last two years alone, according to an investigation by the Associated Press, states have diverted hundreds of millions of dollars raised from these taxes to other uses. In some cases, authorities did the necessary work on 911 systems but kept collecting the tax once the upgrades were done rather than repealing the tax. In other cases, government never even bothered to do the upgrades, but just used the money for other purposes.

Ever on the prowl for new revenues, New York initiated its 911 tax at the dawn of the era of widespread cell phone use, in 1991. Since then the tax has generated more than $600 million in revenues, but of that money, a paltry $84 million has been spent on 911 services, according to an investigation by the Buffalo News. Last year $88 million from the tax went straight into the state's general fund and millions more were used to pay for public safety services that used to be financed by the state's general taxes, including millions spent by the state's National Guard. In New York, so little money makes it to EMS centers from the tax that most counties now have their own 911 tax, on top of the state's tax.

Inspired by such outright audacity, other states have moved in on 911 taxes. Wisconsin built up a $25 million surplus in the fund in just four years, but rather than end the tax or at least cut it after doing the upgrade work, the legislature swept the surplus into the general fund and, just for good measure, more than doubled the fee. This year, according to the AP, Oregon, Arizona, Delaware, Hawaii, Rhode Island and Tennessee are also diverting money from their funds. These states have filched this money even though a 2008 federal law says states can't use 911 taxes for other purposes. Still, Tennessee argued it could take the money because it was only grabbing the interest that was building up on the tax, not the tax revenue itself. That the state didn't do the opposite, which is to cut or repeal the tax because so big a surplus was sitting unused in the bank, tells you everything you need to know about how legislators view your tax dollars-as theirs, no matter what. But at least Tennessee offered a rationale for disobeying Congress. After Oregon's attorney general issued an opinion that the state couldn't transfer money out of its emergency response fund, the governor simply went ahead and did it by arguing "extraordinary" budget circumstances justified the move. Makes you want to tell the IRS that you won't be paying your taxes this year because of "extraordinary" family budget issues.

Politicians love to convert revenues from dedicated taxes into general uses because dedicated levies are often easier to justify to voters who believe (foolishly, it seems) that the taxes will be used as officials claim. Washington, D.C. officials sold the local business community on a gross receipts tax to pay for a new stadium for the Nationals on that grounds that having a Major League Baseball franchise in the nation's capital would add prestige to the city and attract more business. But now city officials want to appropriate $50 million of the new tax, designed to pay off the bonds that financed the stadium, to close the city's general budget shortfall. Washington firms are now realizing that by tapping the tax during tough times the city has essentially converted the stadium levy into a general business tax which will probably remain long after the stadium is paid off.

What happened in Washington should be a warning to local business groups about government building projects. Many, like subsidized stadiums and convention centers, never generate enough economic activity to justify their cost, and the funding mechanisms created to finance these big projects can ultimately be tapped for other purposes by cash-hungry politicians. Call it a lose-lose proposition for taxpayers.

Sometimes the legislative bait and switch not only robs tax money from current taxpayers, but burdens future ones, too. Wisconsin, for instance, has funneled about $1.25 billion of revenues from gas taxes and driver fees out of its state transportation fund since 2003 and into general spending. To make up for some of that diverted revenue, the state has floated nearly $1 billion in transportation debt that future taxpayers will have to pay off. To justify the switcheroo, Wisconsin politicians argued that it's only fair that future taxpayers, who will enjoy any benefits from investments in better roads, pay a part of their cost. That logic, of course, ignores the fact that current taxpayers have already paid more than a billion dollars for better roads that the state simply seized and spent elsewhere.

Given the chance to vote on these matters, taxpayers often reject such shenanigans. California voters, for instance, approved a number of dedicated taxes over the years through the referendum process, which legislators can't tinker with on their own. This May desperate California politicians asked voters for permission to divert money from tobacco taxes and from an income tax surcharge on wealthy residents to the state's general fund in order to balance the budget. Voters overwhelmingly defeated both requests, though they did approve one measure on the ballot, to deny pay increases to legislators. That pretty much sums up how California voters feel about their legislators.

It's become fashionable in political circles to say that a crisis is a terrible thing to waste. That logic has led to a panoply of taxes, surcharges and new government fees enacted during this fiscal crisis that won't be disappearing any time soon. Over time most of us will forget, if we even ever knew, why those taxes were passed in the first place and what they were originally dedicated to financing. Like the federal excise tax on phone service, first enacted in 1898 to help pay for the Spanish-American War and then revived and expanded several times over the next century, their original intention will simply faded into the mists of time. Most politicians are counting on it.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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