Tax Cut? More Like Tax Swap

February 20, 2007

Across the country, local governments and state legislatures are taking aim at the public’s frustration over property taxes, promising tax reform that includes drastic cuts in property taxes. But in most cases, the government is not cutting the overall tax burden. Rather it is merely lowering property taxes and raising other taxes, like sales, income, or taxes on businesses which they view as an easier sell politically. Or in some cases, they seek to export their tax burden by switching from a tax that will be borne by its residents to a tax for which out-of-towners will be forced to pay a large chunk, such as tourism taxes. An example comes to us from the battle for tax reform in Florida courtesy of the Miami Herald:

After months of promising ”simple” changes, state lawmakers today will host a tax-cutting summit where they’ll be confronted by this complex reality of property tax policy: It’s a zero-sum game in which many homeowners have benefited to the disadvantage of Florida newcomers and owners of businesses and second homes.

That puts legislators in a bind because any tax change could threaten a powerful voting bloc. So they’re hosting a statewide listening tour of taxpayer gripes, and considering some ideas once given short shrift. For example:

Raising the state sales tax by two to three cents in exchange for repealing the $7.5 billion state property tax that pays for schools. In the past, any tax increase — regardless of a decrease elsewhere — was viewed as an increase in the GOP-controlled Legislature. (Full Story)

Politics and public opinion typically drive these decisions with little concern for economic efficiency. Many dislike property taxes because they view the benefit received (i.e. education) from the spending as being little or nonexistent. Many politically active groups tend to feel this way. So lawmakers respond by lowering their property taxes and raising taxes on others or raising taxes on everyone through another means.

But citizens and policymakers need to understand one of the most fundamental laws of public finance: unless you are in the rare situation whereby cutting tax rates can raise revenue (i.e. you’re on the right hand side of what economists call the “Laffer Curve”), you cannot cut taxes unless you cut spending.

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