Fiscal Responsibility
Extravagant fiscal policies threaten the financial well being of the states. More state spending inevitably leads to higher taxes and bigger government. An ever-expanding public sector is counter to the basic Jeffersonian principles of freedom and limited government as expounded in the United States Constitution. We ignore these principles at our own peril, as their logical conclusion is increased corruption and infringement on individual liberty.
The ability to raise taxes or enact new taxation policies should be limited. Chief Justice Marshall said that the “power to tax is the power to destroy.” Therefore, new taxes should require a broad consensus among the people of the states. It is inconsistent with the theory of limited government to allow 51% of the people to financially bind the other 49%.
Governors need the authority to reduce spending in legislation without vetoing the entire bill. Governors in 43 states currently have line-item veto authority on taxation and appropriation bills. Giving the governor this power has the effect of reducing or eliminating wasteful special interest funding, or “pork barrel” spending, since governors can more effectively stand firm against regional interests.
Internet Taxation
Now more than ever, the electronic commerce industry needs to be left free from government interference. Our nation’s explosive economic growth in the late 1990’s was spurred mainly by increases in productivity. The main factor in this productivity increase was the uninhibited development of the Internet and related electronic commerce. This growth was further aided in 1998, when Congress imposed a three-year moratorium on Internet sales taxation.
States entering into an interstate compact due to the perceived threat posed by electronic commerce are ceding their own taxing authority. Concern over the “loss” of revenue has prompted some states to create an interstate compact designed to hunt and capture revenue from retail e-commerce. This coordinated effort to force electronic vendors to collect and pay sales tax to the state governments is not only unworkable but also has the potential to deliver a fatal blow to the infant e-commerce industry. Furthermore, the compact will potentially restrict the ability of states to have sales tax holidays and local option sales taxes.
Interstate compacts should be transparent and accessible to the public. The public currently has little knowledge or ability to attain information on the business conducted by the governing bodies of interstate compact. In a free society, the public has the right to have notice of an opportunity to be heard at government meetings as well as the right to access the official records of such meetings.
State officials regularly over-estimate “losses” in sales tax revenue due to the growth of Internet sales. The basis for projected sales tax revenue losses due to e-commerce is unreliable and subject to dispute. Current forecasting is largely derived from anecdotal observations and from generalized assumptions extrapolated from private research data. In light of the important policy implications raised by the advent of the Internet, it is paramount that state legislators possess accurate, empirical data with respect to e-commerce. It is also crucial that legislatures reassert their rightful authority over state tax policy and force state revenue officials to validate their claims. As the Congressional moratorium draws to a close, state legislatures are scrambling to tax sales on the Internet. Any argument in favor of taxing sales on the Internet is problematic in light of Constitutional provisions regarding interstate commerce and interstate compacts. This is especially true with the use tax. The use tax is the functional equivalent of a tariff on interstate transactions in violation of the spirit of the Commerce Clause.
Tax Reform and Taxpayers’ Rights
Progressive income taxes place an undue burden on the taxpayer. Forty-four states impose broad-based income taxes, and the income tax rates are progressive in all but six of those states. As incomes rise to match inflation, the progressive income tax structure automatically extracts higher percentages of that income for state budget coffers. A “flat tax” system is more equitable for all taxpayers.
If a state insists on imposing a progressive income tax, tax rates should be indexed. Indexing the tax rate with the rate of inflation ensures that taxpayers are equally burdened. Indexing also prevents “bracket creep”, which forces taxpayers into higher tax brackets even though real income has remained flat.
The best income tax system is a flat income tax. Though the ultimate flat tax on income would be zero percent—no income tax at all—if an income tax must be imposed, a flat rate system is preferable to a progressive rate structure. Currently, fourteen states have either a zero percent tax on income or a flat rate tax on income. Most evidence demonstrates that states with no income tax have experienced much greater economic growth than those that impose an income tax.
Capital gains taxes are detrimental to capital investment and economic growth. Capital gains taxes have devastated industries such as banking and real estate. The result is reduced employment opportunities for all Americans. Many economists believe that greater economic activity spurred by lower capital gains taxes will generate enough state tax revenues to pay for the revenue loss caused by a tax cut.
Occasionally, an employee’s compensation, promotion, or evaluation is based upon previous tax collections or assessments. This occurrence not only violates an employee’s privacy, but also inhibits the employee from advancing because of previous transgressions that may or may not have an impact on future performance. This practice needs to be stopped.
Taxpayers are often required to pay a tax assessment in order to have the ability to exercise their right to dispute or appeal the assessment. This “pay-to-play” requirement places an undue burden on taxpayers and especially on small businesses. Even if the appeal is valid and the taxpayer receives money back as a result of the appeal, that period of reduced liquid funds poses a threat and this practice should be eliminated.