Sound Tax Policy Lite

From the November - December 2017 edition of Fiscal Focus

Is it possible to be an advocate for sound tax policy without considering the fiscal health of government and the obligations tax revenues support?  That question occurred to me as I received a number of increasingly excited e-mails from the Tax Foundation of Washington DC regarding current federal tax reform developments.  That organization’s research, education and advocacy work has had a huge influence both in shaping the republican pro-growth tax reform agenda and marketing it to the public.  Yet, according to the Foundation, with perhaps some false modesty, their influence specifically and at this moment in time generally is simply a function of “a passion for sound tax policy.”

A lot of people (full disclosure, me included) are questioning the “soundness” of the tax policy reform proposals – noting among many things, the timing; the antithesis of stability and predictability in the uncertain, temporal mess of phase-ins and expirations to meet budget rules; and the innumerable administratively challenging, work-around creating, horizontal equity ruining, special interest-favoring provisions and implementation issues created by the abhorrent process and speed by which the proposals are (or are not) being vetted.  But also on the list are the deficit and budget ramifications of these proposals.  Even under the Tax Foundation’s own modeling results – in which projected GDP growth exceeds the results of other dynamic model scoring by a factor of 5 to 10 – the federal deficit still increases by over a half a trillion dollars over the next 10 years.

For the most part, proponents of these tax reform proposals have nothing to say about any potential impact on the spending side of the ledger.  As a result, even some conservative critics interpret this effort as a cynical ploy to “starve the beast” dressed up as sound tax policy.  As former Reagan domestic policy adviser and Bush treasury official Bruce Bartlett has commented, “Literally the second the ink is dry on the tax cut, deficit hawks will emerge from their hibernation, where they have had nary a word of criticism about increasing the deficit by $1.5 trillion, to demand that Social Security and Medicare be slashed because the deficit has mysteriously increased.”

Advocating for good tax policy without considering the relationship between tax revenues and existing public services/spending programs is an intellectual convenience certainly not afforded to state and local governments.  When operating under balanced budget requirements, simple fiscal responsibility must trump dynamic modeling and the supertanker cargo of estimations and false precision it unloads on policymakers and the public (e.g. did you know Minnesota could expect 18,254 new full time equivalent jobs thanks to tax reform?).  Based on projections by the Joint Committee on Taxation and the Congressional Budget Office, if fully implemented the House’s tax reform proposal would reduce federal revenues by 8.2% in FFY 19-20.[1]  That same percentage applied to our own FY 18-19 general fund budget would represent roughly $3.5 billion in reduced taxes.  We can only imagine the hoots of derision if MCFE came out with a pro-growth tax reform plan that checked the boxes of all good tax policy principles and theory but left a $3-$4 billion crater in the state budget.

Good tax policy cannot simply ignore the situation on the other side of the ledger.  Many observers of federal tax reform make an important point when they note for all the handwringing about the $1.5 trillion increase in the deficit from tax reform, that figure is about 2% of the deficit growth the CBO projects over the next thirty years arising from projected Social Security and Medicare spending growth.

A quarter century ago, in his inaugural “From the Director” column for Fiscal Focus, new executive director Dan Salomone made this important – and still exceptionally timely – observation:

“Greater efficiency in the provision of public services is our last card to play.  We’ve tried buying down property taxes with state taxes; we’ve tried shifting taxes from low-income people to high income people and from low value property to high value property…Our only hope for a rational tax system lies in spending reform.  Advancing the cause of efficiency in government has everything to do with good tax policy.”

Being serious about good tax policy demands the recognition that tax policy and fiscal policy are joined at the hip.  It’s why we changed our name a few years ago to capture that reality.  It’s why our historically tax-focused organization also invests considerable time and effort in pension reform, education finance, state/local relationships, civil service redesign and many other areas.  And it’s why sound tax policy is not just a worthy policy objective in its own right but also the means to a larger and no less important end – fiscal responsibility.

[1] Sources: JCT 11/17 TCJA spreadsheet and CBO 6/17 Update to Budget and Economic Outlook, Excludes receipts from Social Security payroll taxes.  Calculations by MCFE.