NO successful historical precedent for Medina's sales tax proposal

Gubernatorial candidate Debra Medina

From the Texas Public Policy Foundation:

A sound tax system is simple to understand, not overly costly to implement, and minimizes economic distortions.  Compared to other states, Texas' current tax system is sound, but it can be improved by repealing property taxes and replacing the revenues with a reformed sales tax.

So in other words, Texas' current tax system is simple to understand, not overly costly to implement, and minimizes economic distortions.  Did I get that right?

Many of my readers have left comments over the past few days ranging from calling me a Liberal or at the very least a RINO, to unabashed praise and expression of support for Republican (Libertarian?) Gubernatorial candidate Debra Medina, to one respondent who did everything possible not to rattle off a long string of four-letter words expressing her disgust with me.  I especially liked the comment about "reading the whole thing," referring to the TPPF report quoted above, before popping off in response again.  Now, what could elicit such an emotional reaction?  You would think I just advocated partial birth abortion at a Southern Baptist church service!

It was because I expressed concerns to Mrs. Medina in my questioning her support for a move from Texas' current property tax system to a consumption, or sales, tax-based system.  Liberal.  RINO.  Left-plant.  "The problem in the Republican Party."  I was labeled all of these and more.

Ironically, it sounded much like what I have heard at local town hall meetings over the last month, and I suspect from much the same crowd!

Readers and myself were pointed to TPPF's report advocating a move from property taxes to a sales tax system in Texas.  And I read over the major sections, seeing what jumped out at me, expecting to see a section discussing the regressive nature of consumption taxes on low wage earning families.

Never saw it.  Not once.

There wasn't a section dealing with "pro's and con's" of the proposal.  There wasn't a section titled "arguments against a consumption tax system."  Nothing allowing for an open, fair discussion of the pitfalls of such a system.  So please forgive me for taking TPPF's report as seriously as I am taking the Libertarian philosophy behind the elimination of property taxes and the switch to a consumption tax.  But public policy depends on a fair deliberation of both (all?) sides of an issue.  And consumption taxes are written about extensively enough to warrant their con's being included in such a report as this one which will undoubtedly be read by (some) Legislators.

It was completely absent.

So allow me to draw into the discussion some of the "opposing" points.  And please feel free to respond if you can do so without cursing me, calling me Liberal, RINO or "Left-plant," or saying that I am the problem in the Republican Party.  Comic relief, but invalid, inaccurate assertions at best.  Clouded, ignorant, ranting, raving, biased, Libertarian attempts to shout me down at worst.

I quoted an article from the Brookings Institute in my last piece which discussed the difficulties of a consumption tax-based system.  And I will be doing a more extensive piece on the adverse impact such a system would have on the poor.  I believe that I even mentioned this problem in one of my previous articles.  I like quotes, too!  So without delay, here are some more--from another Brookings article:

The flat tax and the idea of fundamental tax reform dominated policy discussions in 1995 and the early part of 1996. These proposals aimed to replace the income tax, drastically simplify taxes, and spur economic growth by flattening tax rates, eliminating tax preferences, and taxing consumption rather than income.

Well, 1995 and 1996 would coincide with the Contract with America and Dick Armey's misguided attempts to implement (or at least appear to favor implementing) the flat tax.  Well, my former U.S. House Representative always did like the flat tax--got elected on its supposed merits.  He even made it a cornerstone of the Contract with America, which I have written on previously.  It got him elected.  It got Republicans control of both houses of Congress.  And it never stood a chance of being implemented.

William Gale of the Brookings Institute herein discusses the difficulties with consumption taxes.

Sales tax advocates claim their plans would dramatically boost prospects for economic growth, simplify the tax system to the point where states could collect the tax and the IRS could be abolished, reduce costs of compliance by an order of magnitude, and provide Americans with a tax system that is fair, visible and understandable.

Nothing like promising the stars, huh?  Advocates of a consumption tax want a fair system.  Yet even TPPF admits readily that Texas' system is already sound.  What is the difference between fair and sound?

For example, the sale of a newly constructed home to a family that will occupy it is a retail sale. But the sale of that same newly constructed home to a business that is planning on renting it to others is not a retail sale. Nor is a sale of an already existing home from one occupant to another.

Ironically, advocates of Mrs. Medina's proposal to eliminate property taxes claim that an unfair system exists where the government "owns" their property and they are actually just "leasing" it due to the assessment, collection and payment of property taxes.  They claim that by eliminating property taxes and replacing them with a statewide sales tax the entire statewide system of assessment and tax collections can be eliminated.  They claim that a low property tax rate of 19-23% can be achieved, and that every single dollar now collected through property taxes can be collected via this sales tax system.  And they claim that a one-time sales tax on the purchase of a home can be levied, paid and then never be levied again.

And granted, Mr. Gale is discussing the move to a national sales tax in place of federal income taxes, ironically, another source of contention with the same crowd.  Hopefully you can follow the chain of logic, because his points address every point of contention that advocates raise, including in comments to my previous articles I might add.  The problem with the TPPF report is that it neither acknowledges, nor discusses disadvantages with such a fundamental, statewide revenue collections policy shift.

Mr. Gale mentions two plans that call for 15% and 23% sales tax rates, respectively, and goes on to state that there are many considerations to take into account that would most likely raise those rates significantly.  And the higher they go, the more likely evasion becomes a problem.  He points out that governments have stated that above 12%, sales taxes are too easy to evade, and the evasion rate for sales taxes is 15%.  As for the argument that a consumption tax system would be more effective, he states:

The most optimistic assessment would be that there is no historical precedent for a country to enact a high-rate, enforceable, national sales tax.

It is ironic to note the similarities in arguments in Libertarians arguing for the elimination of property taxes and Liberals advocating the current health care proposals.  Both want a more efficient system and argue that a higher level of government can provide the same.  Yet neither system has a successful historical precedent to point to!

See if this argument sounds familiar:  "Income in the first year would increase by between $3.1 and $3.3 Billion."  Oh really?

Estimates suggest a well-functioning, broad-based consumption tax, with limited personal exemptions and limited transition relief could raise income per person by up to 2 percent over 10 years. But more generous transition relief or erosion of the tax base would drive the growth effects to zero fairly quickly. These results stand in sharp contrast to AFT's claims that after 10 years of a sales tax, the typical American household would be at least 10 percent and "probably 15 percent better off" than they would have been otherwise.

To answer the question as to why I didn't include that little statistic in my previous article, does that quote answer the question sufficiently? 

How about fairness?

If households are classified by annual income, the sales tax is sharply regressive. Under the AFT proposal, taxes would rise for households in the bottom 90 percent of the income distribution, while households in the top 1 percent would receive an average tax cut of over $75,000.

Wow--talk about tax cuts for the rich!  Now again, Gale is discussing the move from federal income taxes, not state property taxes, to an income tax system.  To clarify, Gale states,

The sales tax would raise burdens on low- and middle-income households and sharply cut taxes on the top 1 percent.

And further:

Opposition to the sales tax is not a partisan issue. Robert McIntyre of Citizens for Tax Justice decries the sales tax as unworkable. The Wall Street Journal calls the sales tax a "VAT [value-added tax] in drag" and highlights concerns about administration and enforcement. Bruce Bartlett of the National Center for Policy Analysis concludes that the sales tax is a poor choice for replacing the tax system. Joel Slemrod of the University of Michigan pronounces the sales tax as NAUSEA-I, an acronym for "not administrable at usual standards of equity and intrusiveness."

"NAUSEA"--I love it!  And to be fair, Gale ends with the following, acknowledging that tax reform, albeit at the federal level, is necessary.  I will, thus, surrender that perhaps the point applies to Texas' State property tax system as well.  But as usual, the Libertarian element has taken one source, exploited and quoted it extensively, and set itself up to look utterly ridiculous, taking on a proposal with major holes in it and launching out a la the Titanic.

These problems with the sales tax do not imply that tax reform is a bad idea. Improvements to the tax system are sorely needed. Other types of consumption taxes, like value-added taxes or variants of the flat tax, should receive careful consideration. Many of the gains of moving to a consumption tax could also be obtained through judicious modifications of the income tax. Since income tax reform may also generate much smaller transitional problems, it should be considered seriously, and first.

So, "reform," not replace.  Kind of like audit, not end.  For further consumption:

http://www.brookings.edu/papers/1998/03taxes_gale.aspx