State Budget Struggles Beget Bad Policy Ideas
Early on in the pandemic, I wrote a policy brief for the National Taxpayers Union Foundation warning of the danger of tax hikes and otherwise inadvisable tax policies coming out of revenue-starved state houses during a recession. As with most predictions that one hopes will prove unfounded, this one is of course coming true.
Also unsurprising is that it is California leading the bad-policy charge (not that the state has ever needed a recession to pass ill-advised proposals). Members of the state legislature have proposed combating budget pressures by boosting its already-high 13.3 percent top marginal tax rate to 16.8 percent.
That alone would likely be enough to aggravate California’s problems with keeping its taxpayers in the state, but California tax advocates have more (cattle) irons in the fire. Proposition 15, on the ballot in the state this November, proposes amending the state constitution to allow taxes on commercial and industrial properties to increase by more than the currently-prescribed 2 percent, no doubt encouraging businesses to flee the state as well.
And the cherry on top is a proposed 0.4 percent wealth tax. A 0.4 percent rate may sound low, but that’s largely a function of the way wealth taxes work. When income taxes, for example, are assessed on a taxpayer’s annual income, that income will never have to face income taxes again. Wealth taxes, on the other hand, are assessed on the same wealth year after year.
Even the lower end of national wealth tax proposals, with rates that start at 1 or 2 percent, can have serious consequences forentrepreneurship and private charities. Considering state taxes are generally supposed to be the lighter burden compared to federal taxes, even a 0.4 percent wealth tax is substantial. Furthermore, were other states to adopt similar taxes, the cumulative effect could be massive.
And while California deserves the Golden Raspberry, other states could easily catch up with their own poor ideas. The New York-based Fiscal Policy Institute recently recommended the implementation of a mark-to-market regime, or taxation of unrealized capital gains on an annual basis. I’ve explained in more detail the problems with such a regime in the past, but suffice it to say that it would be a difficult-to-implement system that would require state investment in administration and create substantial tax compliance burdens for the taxpayer — both things that are particularly infeasible in the midst of a pandemic.
New York has also been guilty of aggressively taxing remote workers. From hitting medical workers who volunteered to come to the state with tax bills to its rules that let it double-tax remote workers’ income, New York could cost a lot of taxpayers a lot of money come next April. Fortunately, Congress is currently considering preemptions that would address this problem as part of its Phase Four relief efforts.
And states aren’t the only ones responding to the recession by hitting taxpayers in the wallets. Cities and localities have also embraced tax hikes, from Seattle’s renewed attempts to tax employment to Nashville’s 34 percent property tax increase.
Neither can either states or localities complain of a lack of federal aid. The CARES Act included $150 billion in aid to states and localities. In most cases, only a fraction of what was allocated has actually been spent thus far.
Now more than ever, taxpayers must be wary of cities and states taking the easy way out of budget holes by raising taxes instead of doing the hard and politically unpopular work of trimming extraneous spending. After all, the last thing taxpayers need right now is greater tax burdens and further millstones on the economy.
