November 6, 2007

November 6, 2007 | Commentary on Taxes

Taxes: Time to Cut and Run

Politicians say the oddest things.

Recently, Maryland's Democratic Gov. Martin O'Malley called a special legislative session. He wants lawmakers to raise taxes to close an expected budget shortfall. Among the taxes he hopes to increase are the sales tax, the corporate income tax, the tobacco tax and income taxes on the people many politicians call "the rich."

O'Malley seemed to think it was important to jack taxes up right away, which is why he called a special session instead of waiting for the legislature to convene as scheduled next year. "The cost to taxpayers is too great if we wait," spokesman Rick Abbruzzese told reporters.

But taxpayers won't pay a higher cost as long as the state waits to raise taxes; it's when the taxes are raised that taxpayers suffer.

Let's remember that at least two of the proposed taxes are regressive, likely to hit poor people harder than "rich" ones. Consider sales taxes. Everyone pays them, but poor people pay a greater proportion of their income than rich people do when sales taxes rise. The same holds true for corporate income taxes. Corporations don't pay taxes -- they just pass the added costs on to their customers, so rich and poor alike pay more for virtually everything they buy.

Politicians in Maryland say they need to raise taxes to close a $1.7 billion deficit. But taxes there are already high. According to the Tax Foundation, this year Maryland taxpayers had to work until May 1st to pay their total tax bill. That puts the state 16th nationally in tax burden.

It would be far better for policymakers to cut some of their profligate spending before they even consider a tax increase. Lawmakers should also remember the lesson of the 2003 Bush tax cuts. Cutting taxes (the right way) increases economic activity. That can end up increasing government revenue. We're seeing that on a national level these days.

Our federal government collected $161 billion more this year than last, proof that tax cuts pay dividends year after year. Lower tax rates have motivated people to work, save and invest more, which has caused the economy to grow faster than expected.

Surging revenues have become a trend. Since Washington cut taxes, more and more money has flowed into federal coffers. Revenue was up 12 percent in 2005, 15 percent in 2006, and an additional 7 percent in 2007.

Still, even with the Bush tax cuts in place, Americans remain over-taxed. Last year the per capita federal tax burden was $8,197. That's $574 more (in inflation-adjusted dollars) than the year before, and it's the highest burden ever recorded, up $160 (in constant dollars) from the previous all-time record set in 2000.

The burden on Maryland residents is particularly high. The state collects $1,638 per capita in personal income tax, more than twice the national average of $813.

But there is one good feature to Maryland's income tax, and ironically it's the one that O'Malley wants to change: The state has a flat tax. Everyone who earns more than $3,000 per year pays 4.75 percent in taxes. Flat taxes are fair taxes because they treat everyone equally.

O'Malley wants to increase tax rates on higher earners to make the system more "progressive." But when a government increases tax rates, it penalizes productive behavior, such as work, risk-taking and entrepreneurship.

Maryland lawmakers should find places to cut spending. The income tax rate should either be left alone or cut to reduce the burden to taxpayers and to encourage economic growth.

However, if they're going to opt for an old fashioned tax increase, there's certainly no need to hurry. A tax hike would only take more money out of people's pockets and damage the state's economy. That would be an odd direction for lawmakers to rush in.

Ed Feulner is president of The Heritage Foundation (heritage.org).

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

Related Issues: Taxes