You can't tax yourself out of debt
By ROBERT MEADOWS
Port Orchard Independent columnist
April 16, 2009 · Updated 12:01 PM
If you believe in magic, as apparently some of our state legislators do, then you believe that merely changing our state’s tax system can prevent revenue declines during a recession.
Fueled by excessive borrowing, the economy grew for a few years more quickly than the ordinary pace.
The “housing bubble” was the most obvious effect of this borrowing. Once lenders stopped making risky loans, the construction industry slumped even more than other sectors of the economy that had thrived on borrowed money.
Now, state and local tax revenues are well below the levels they had reached in the recent past. Revenues from both the sales tax collected on the value of labor and materials used in construction and the real estate excise tax on property sales have fallen.
Instead of accepting that a shrinking economy causes tax revenues to decline, it is fashionable in some circles to blame our reliance on sales taxes.
The missing ingredient in our tax system, according to several legislators, is a state income tax.
Such a tax would provide steady revenues, they say, because it wouldn’t be affected so much by drops in spending.
Anyone who goes looking for evidence to prove that this magical result actually occurs will not find it.
Revenue from an income tax ordinarily declines during a recession even more than revenue from a sales tax. When people spend less, profits fall, capital gains disappear, and unemployment rises — all causing income tax revenue to fall.
Moving the tax collection point so that government takes a portion of earnings as they are received rather than as they are spent doesn’t prevent a decline in tax revenue.
Revenue from a tax on wages and salaries would drop less than revenue from a tax on profits and capital gains, but would usually drop more than sales tax revenue.
During this recession, unlike previous recessions, it is possible that revenue from a tax on wages and salaries wouldn’t have fallen as much as revenue from the sales tax.
So much of the sales tax revenue resulted from spending borrowed money rather than current earnings that the drop in lending may have had a greater effect than rising unemployment.
But if this is correct, then the result isn’t magic. It’s a case of continuing to pay taxes on dwindling personal earnings while one’s standard of living is forced down by declining income.
Reality is reflected in this year’s property tax ballot measures for the South Kitsap School District and South Kitsap Fire and Rescue District (SKFR).
Voters approved a higher local school levy knowing that income may not rise enough by the time the tax comes due next year to offset the few dollars more they will pay.
But faced with the need to pay for a core function of government, and knowing that state school funding would probably be less in the coming two school years, voters agreed to pay a little more to soften the blow.
When the SKFR emergency medical services levy appears on the ballot in May, voters should again approve an increase to pay for needed improvements in EMS response capability.
The EMS levy increase is a few dollars more in property taxes, but improving the fire district’s ability to respond to EMS calls requires the increase.
In both cases, more revenue from local taxpayers is needed, and no magic can produce it for us.
Our legislators face some hard choices in adopting a budget for the coming two years.
Having increased spending by more than 7 percent a year in the last two biennial budgets, they must either limit total spending to roughly the level of the current fiscal year or raise taxes.
The choices are especially difficult for those who want government spending for all programs to behave like a ratchet wheel — always going in only one direction.
Maybe they want to believe in magic because it hurts too much to face reality.
Bob Meadows is a Port Orchard resident.