I didn’t have much hope for the final bill that I introduced this legislative session before our tax committee. It tried to solve a big problem – and my experience in the legislature is that the larger the problem you try to solve, the smaller the chance that your bill will pass.
My bill tried to accomplish two things. One wasn’t controversial. Was the other controversial? Well, maybe a little bit.
The uncontroversial goal was to require our state’s tax bureaucracy to calculate how much revenue was lost through income tax exemptions, credits and incentives aimed at benefiting particular groups. I’d like to know how much that comes to, and the information isn’t readily obtainable.
The more controversial goal was that the bill would eliminate every single one of those special tax privileges about eight years from the date of passage – and in exchange for their elimination, everyone’s tax rates would drop proportionally. In short, the bill wouldn’t cost anything; it would just shift lower taxes from the favored few to everyone else.
Why do this? Well, we all know that every time the legislature approves a special tax privilege for one group, we’re shrinking the tax base. In my opinion, we ought to work towards lower tax rates for everyone, as opposed to having a higher tax rate for the general public with special privileges for a few.
Furthermore, things go so fast during the legislative session that it’s hard for us to set aside time to go over every single credit, exemption and incentive and see whether we still need it. It is simple human nature to pay more attention to immediate and urgent needs, even if we ignore the important job of an overall review of our tax system. If we have a deadline, it will force a review.
We all know that there are plenty of worthwhile tax adjustments that are worthwhile and that would have universal support. We also know that if we actually passed something that forced elimination of special tax privileges with a deadline far in the future, the first thing that would happen is that we’d move to protect and preserve about half the measures that we’d otherwise strike away eight years from now. That’s fine with me: what that means is that we’d look at the other half later on and see if we still needed them.
Most importantly, here’s the upside of what would happen if we actually passed this. Most people’s income taxes would drop. That’s good not just for obvious reasons, but also for reasons of interstate business competitiveness. When Texas, Tennessee and Florida have no income tax at all, we need to be as competitive as we can in order to attract new business investment.
Furthermore, every time we got rid of some special tax privilege, everyone’s income tax would drop more, and lawmakers would have an additional incentive to pay attention to the cost of salting special-interest privileges into the tax code.
Some members of the tax committee thought this was a great idea. The first question I got was from Rep. Allen Maxwell, who asked me why I hadn’t included sales tax privileges in the bill along with income taxes. I answered back: “Are you suggesting that this bill isn’t ambitious enough? That it does too little?” This provoked guffaws from several committee members, who clearly thought that an 8-year deadline for tax privileges was a dangerous and radical idea that shouldn’t receive serious consideration.
I then received several less friendly questions, along the lines of: “Are you saying that we should eliminate the tax deduction for interest from state bonds that sweet little old widow ladies have come to depend on?” I had made it clear in my presentation that I thought that the bill, if it passed, would provoke immediate changes in the next session that would bring back obviously needed deductions, such as those for deductions of state bond income, and I reiterated that.
Another legislator indignantly pointed out that the bill had received no revenue impact statement from state tax bureaucrats. I responded that the bill was what is called “revenue neutral,” which means that every dollar that would be taken away (by eliminating a special-interest provision) would be given back in the form of lower tax rates for everyone – so there was no necessity for a revenue impact statement.
Rep. Barry Hyde, who cosponsored the bill and agreed to sit beside me and take questions as I presented it, at that point whispered in my ear that the arguments made against the bill did not seem to be strong. The language he used, however, was more blunt.
I was very impressed by Rep. Robert Moore’s question. He was careful not to endorse or condemn the bill, but reiterated that the structure of the bill would force us to deal with the real costs of favorable tax treatments to one group or another — in particular by reducing tax rates for everyone if we managed to get rid of some special-interest exemptions. He called this an “interesting idea.” It is my prediction that Rep. Moore will be Speaker of the House next session, and I can only hope that he continues to find this idea just as interesting then.
Ultimately, we could see the writing on the wall when a state tax bureaucrat, Tim Leathers of the Department of Finance and Administration (DFA), came forward to testify against the bill. Leathers argued that the bill would delegate to DFA too much power over tax rates, and that (if I understood him correctly) we would see a swarm of lobbyists come to the Capitol to reintroduce the many tax privileges that the bill would eliminate.
Leather also noted that the bill was imperfectly drafted and left some questions open as to how it would work; this was probably his strongest argument, but since the bill would have had no effect on taxes until eight years after passage, I think it is a possibility that those questions could be addressed in the interim.
In a closing statement, I argued that Leathers’ statement was an eloquent confession of the fact that these tax privileges are immortal – that unless we take some kind of action and have some kind of deadline, we will simply be without any incentive to do anything about the ever-growing list of tax privileges we have in the Arkansas tax code.
Rep. Maxwell was kind enough to make a “do pass” motion to send the bill to the full House. The vote was anticlimactic: the NOs were a little louder than the YEAs, and the chairman ruled that the bill had failed to pass the committee. (In committee, the chairman typically decides whether a bill passes or fails depending on what I call “voice volume.” As you can imagine, this provides some opportunities for gamesmanship. It also discriminates against older legislators who cannot yell as loudly.)
If the voters send me back to the legislature again, I will try again to achieve the lower taxes that this bill would deliver. I think it is the only way we will ever have a broad review of whether our array of special tax privileges for special interest groups are all worthwhile.