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Taxes – A Cautionary Tale w/James Prieger (San Francisco Chronicle) February 2, 2009

Posted by daviddavenport in Newspaper Columns/Essays.

The byword of the political campaign season, “change,” has given way to “new.” The “new” administration in Washington offers us “new” stimulus plans, “new” policies on everything from transparency to terror, and even “new” interior design for the White House living quarters.

In that spirit, read our lips: There will also be new taxes.

With state and local governments under increasing economic stress, coupled with a huge and widening budget deficit in Washington, the pressure for new taxes is building. At the same time, the barriers that used to stop them – namely Republicans – are diminished in power. It is a recipe for a host of new and increased taxes, both state and federal.

For starters, the Bush tax cuts are scheduled to expire next year, with House Speaker Nancy Pelosi and others calling for an early repeal this year. That, alone, will lead to an enormous increase in taxes, including the likely return of the so-called death tax on family estates. Meanwhile, legislators in California, Florida, Minnesota and elsewhere are all looking at dramatic increases in fees, which is an end-run around the difficulties of raising taxes.

In New York, Gov. David Paterson seeks $4 billion through 137 new or increased taxes and fees, including his 18 percent obesity tax on soft drinks. Yes, whether through the door or window, the tax man cometh.

Whether you support increased taxes or not, they have significant policy impacts beyond merely raising revenues. And, once enacted, taxes are nearly impossible to stop. Before imposing a range of new taxes, policymakers should study the case of the federal excise tax on telecommunications as a cautionary tale.

Originally imposed on telephone service to fund the Spanish-American War in 1898, it was reinstated in 1932, during the Great Depression, to make up for declining income tax receipts. With more lives than a cat, the tax was scheduled to end six months after World War II, and again 14 other times between 1960 and 1991, but managed to survive. Congress finally voted to abolish it in 2000, but President Bill Clinton vetoed the measure.

More than 75 years after its inception, Sens. Charles Schumer, D-N.Y., and John Ensign, R-Nev., both recently introduced bills to kill the tax.

There are several lessons to be heeded:

— Economic cycles come and go, but taxes (and death) remain. So, easy fixes at the time become long-term policies.

— Taxing new technologies, such as telephones were 100 years ago, often makes less sense and delivers less revenue over time, yet is difficult to stop.

— Novelty taxes, such as New York’s obesity tax or Pennsylvania’s tax on hot air (car wash vacuums) create a patchwork of uneven, inefficient and regressive fees.

— Just as Congress assigned a deadline to the Bush tax cuts when it created them, so should originators of new taxes, mandating review when economic cycles inevitably change. And greater courage is needed so that such reassessments do not result in rubber stamp extensions, as with the federal excise tax.

President Obama’s chief of staff, Rahm Emanuel, told a conference in November: “You never want a serious crisis to go to waste … . This crisis provides the opportunity for us to do things that you could not do before.” That’s precisely what should concern us in the long-term.

So-called emergency measures enacted during the Great Depression and the New Deal still form the framework for most of domestic policy today. New fees here and increased taxes there may address the deficit crisis of today, but will be with us, directing domestic policy, for decades to come. Remember that when you pay your phone tax.

David Davenport is a research fellow at the Hoover Institution. James Prieger is an associate professor of economics at the School of Public Policy at Pepperdine University.

(C) San Francisco Chronicle 2009

To view the article:  http://articles.sfgate.com/2009-02-02/opinion/17188106_1_new-taxes-bush-tax-cuts-federal-excise-tax



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