Want to Reform State Government? Don't Forget the Tax Breaks.

As legislators work towards a final budget for the 2012 Session, they should continue to explore reform of tax breaks - an area of state spending equivalent to billions of dollars per year.

The Legislature should seriously consider reforming how they balance this cost – from  hundreds of exemptions, deductions, credits, and other tax preferences that are not routinely scrutinized during the budget process – against preserving funding for other important priorities like health care and education.

 In the short run, eliminating wasteful or ineffective tax breaks could help policymakers address the ongoing economic crisis in a more balanced and thoughtful manner.

 In the long term, heightened oversight of breaks could improve the overall adequacy, equity, and stability of our tax system. Most economists view tax expenditures as tax subsidies. As the graph below illustrates: ordinary taxpayers must pay higher tax rates to make up for those businesses and individuals that receive preferential tax treatment.  

As this graph shows, without reducing revenues needed to support our vital public systems the state sales tax rate could be much lower, were it not for special tax preferences:

• The current 6.5 percent sales tax rate could be lowered to 5.3 percent simply by eliminating the sales tax exemption on personal and professional services. 
• By further eliminating tax subsidies for businesses, the general sales tax rate could be lowered to 4.2 percent – fully 2.3 percentage points lower than the current rate.

While much of the discussion over the next week will focus on how lawmakers grapple with our immediate budget gap, it is imperative that the long-term adequacy and stability of our vital public systems also be considered.  Accordingly, policies that would force the legislature to routinely consider how tax expenditures impact our ability to maintain important public priorities must be part of the conversation.

For more information on how we can create a more transparent and accountable state budget process by reforming tax expenditures, read the policy brief "Every Dollar Counts: Why It's Time For Tax Expenditure Reform."

*Analysis from this post was originally published December 2010.