This appears to be a growing trends among states and some have taken action, such as Oregon in August 2009 adding sunset dates to many 0f their tax expenditures to ensure periodic review of them (see 8/19/09 post and June 2010 article in the AICPA Corporate Taxation Insider).
I think this happens for a few reasons including that the public seems to want more tax cuts and many politicians keep promising them (and delivering).
The problems of growing tax expenditures:
- Budget problems as evidence by almost all states having continual shortfalls.
- Lack of transparency - the tax expenditures do not show up in the budget because they are buried in the tax law.
- Inequities - special tax deductions provide a greater benefit to higher income individuals in a progressive rate structure income tax. If the benefits being provided via the tax system were instead handled as direct subsidies, they likely would not exist or at least not to the extent they do today. For example, imagine this bill going through any state legislature - To appropriate funds to the Housing Department to enable it to issue annual grants of up to $3,500 to homeowners, with those having mortgages of $1 million receiving the maximum grant of $3,500 and those with smaller mortgages receiving less. That is unlikely to occur, yet that is what exists in the income tax laws of all states with an income tax.
- Complications - the more special rules - exemptions, exclusions, special deductions and credits in the tax law, the more complicated it is.
It will be interesting to see what Maine and other states do with information such as that recently provided to the Maine legislature. As states continue to look for spending cuts, they will need to delve into the spending in the tax system as it represents significant dollar amounts. Doing so should also enable the law to better meet the principles of equity, transparency, simplicity and appropriate government revenues.
What do you think?
1 comment:
I think other states should follow Oregon’s lead on setting sunset dates for tax expenditures. This would really force policymakers to visit the tax expenditure provision for appropriateness. In order for policymakers to decide on whether tax expenditure provision is appropriated, information is required. According to “Promoting State Budget Accountability Through Tax Expenditure Reporting” by Jason Levitis, Nicholas Johnson, and Jeremy Koulish, “[If] policymakers, the media, and the general public lack information about tax expenditures, they cannot fully participate in decisions about how to allocate state resources…A state can address this lack of transparency by regularly publishing s tax expenditure report, also called a tax expenditure budget.” (This report can be found at http://www.cbpp.org/files/4-9-09sfp.pdf) If tax expenditures have the same level of scrutiny as direct spending, unnecessary tax expenditures will be eliminated from the tax law; therefore reducing complexity. With the sunset dates and “tax expenditures report” the principle of simplicity and transparency will likely be met.
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