Experiencing Tax Rules for Realists

There’s textbook principles of good tax policy, and then there’s the rules that dictate how tax policy really works.

One of my favorite tax policy observers is Billy Hamilton, a columnist for State Tax Notes who in his spare time moonlights as the executive vice chancellor and CFO for Texas A&M.  Most of the time Hamilton writes about interesting intersections of tax policy and politics taking place around the country, but occasionally he takes a step back and offers perspective and reflection on the nature of tax policy discourse in today’s society – all in his trademark droll and entertaining manner.

Such was the case recently when his column “Tax Rules for Realists” auspiciously landed on my desk right after the governor vetoed the tax bill.  Hamilton’s premise for his commentary is based on the 2016 book Democracy for Realists.  The book contrasts how democracy is supposed to work (according to 8th grade civics classes) with how it really works (based on the fact that people are too busy with their lives to give political issues the attention they deserve and must rely on social identity and partisan loyalties to establish their positions on issues).  Or as Hamilton describes it, it’s “a 400-page explanation of why no argument will convince your brother-in-law that his politics are dumb – and why he can’t convince you of the same thing.”

In his column, Hamilton ran with this idea noting that tax policy is also framed by generally agreed upon principles and textbook ideas on what is supposed to constitute a “good” tax system, but in practice policymakers are guided by other, far more influential concepts.  His 35 “tax rules for realists” cover general concepts (Rule #3: Taxes are the price someone else pays for a civilized society), tax legislation (Rule #13: Major change comes only with major crisis), and tax administration (Rule #28: The state’s considered guidance may be a taxpayer’s detrimental reliance).

Hamilton acknowledges these tax rules for realists “might easily be called rules for cynics”, which is why they probably resonated with me in the aftermath of this legislative session.  It’s tough not to be deeply cynical watching critical public policy like federal conformity get so completely subordinated to politics.  When considering: 1) 3 of the last 4 sessions ended without a tax bill; 2) the session that did result in a signed tax bill also came with a defunded legislature; and 3) the frustrating and occasionally ridiculous context surrounding tax bill failures (1,000-page omnibus spending bills, the use of an incorrect conjunction, transportation finance lockjaw, etc.) jaundice deserves to be the default condition.

So in recognition of the 2018 session, here are four more rules for the realists’ canon:

Intellectual consistency is the first casualty of tax policy advocacy.  A recent op-ed justifying the governor’s veto of the tax bill veto claimed it “needed to be considered in the context of the federal Tax Cuts and Jobs Act”.  The belief that the tax burdens the federal government imposes deserve to be considered when developing state tax policy is especially interesting because for years these same advocates have steadfastly demanded our never-ending tax fairness debate exclude any consideration of federal income taxes Minnesotans pay.  Suddenly, that mythical state/federal firewall collapsed and tax fairness now urgently needs to be informed by what new federal tax burdens look like.

Evidence-based policy making always serves a faith-based initiative.  Hamilton’s Rule #5 – “All statistics conceal a lie” – is based on the recognition that 1) numbers often fail to tell the complete story, and 2) data can be framed, shaped, and manipulated into fiscal origami to tell the political story that wants to be told.  This rule expands on Hamilton’s idea by recognizing that the use of facts and data in policy development – as important as that may be – serves a wide variety of belief systems such as the ability of tax cuts to pay for themselves and the everlasting attractiveness and value proposition of Minnesota government spending regardless of the associated tax burden.

The impact of taxes on behavior is inversely proportional to the scale of behavior affected.  Considerable political skepticism abounds regarding the idea that tax policy has the ability to attract or repel talent, influence siting decisions, and affect other large scale economic behaviors.  But there is near universal belief that there is no individual or household behavior, however small, that won’t be encouraged, enhanced, or preserved by a tax deduction, exemption, or exclusion.

If it doesn’t offer a political payoff, it ain’t going to happen.   See federal conformity.

It’s too much to ask that textbook ideas of tax and public finance policy will ever supplant the rules for realists.  However, we can hope they can regain some traction in a new political environment.  In that respect, the November elections can’t come soon enough since it’s clear the mix of players and personalities we have right now just isn’t working.  We need to come to a recognition that compromise on almost any issue should be embraced if the result is better than what currently exists.  Whether that is even possible in today’s hyperpartisan world is a looming question.

Or as stated in Rule #24: Tax policy compromise is a dying art form.