Tax ‘reform:’ why it should raise red flags

Nevada’s taxation department issued a report Monday listing $2.2-billion in new annual revenues that allegedly could be collected if certain tax exemptions, credits, abatements and preferential tax rates were removed from state law.

The report can serve a constructive purpose. However, its language, the reactions to it by some politicians, and long traditions in Nevada of politicians trying to sneak tax increases into law under the guise of “reform” or “restructuring” immediately raised red flags regarding the public interest.

Actual reform involves packages of changes that are “revenue neutral” — packages that are expected to neither increase nor decrease total revenue levels, but provide greater revenue stability or other value. Such changes are always welcome. And some of the revenue measures assessed by the study perhaps could be used in real reform, provided that other current taxes are cut in a manner to just compensate for the increases.

But whether that’s the real purpose of the report is cast into serious doubt because it calls the items that could raise new revenues “tax expenditures.” Thus, it’s based on the assumption the money at issue rightfully belongs to the government, not to the taxpayers who earned it. In that view, the amounts not collected by the government were a favor to those who pay less than they would pay if the tax increase were levied, and the government was thereby shorted.

Suspicion of this report and current talk about tax reform or restructuring was heightened by a university official in a recent magazine article saying Gov. Kenny Guinn’s 2003 proposed gross receipts tax — which would have been the largest tax increase in Nevada history — was an example to emulate. As one of 15 Assembly members who provided the deciding votes to stop that awful idea, I know there was no virtue at all in it. It was the grand-daddy of the margins tax that voters just defeated four-to-one, and both proposals were totally cynical, unprincipled and contrary to the public interest.

Why contrary to the public interest? For 55 years, as shown by a significant body of empirical economic studies, total government spending in our country has been greater than the levels that maximize economic growth and thus maximize collective human well-being. Further, the state/local government spending in most states, including Nevada, is also higher than public-interest levels.

Worse, Nevada general fund spending has risen over the last 20 years 16.5 percent faster than the incomes of Nevada families and businesses, despite already being unduly high. Almost all the divergence has occurred since 2008, a period in which those incomes fell 10.8 percent in real per-person terms – a decline greatly caused by government excesses at all levels.

That university official also said the margins tax proposal might lead to productive “conversations” about tax structure. The tax-and-spend crowd regularly hides behind such disingenuous euphemisms to conceal their desire to increase your taxes. They also talk endlessly about the great things they’ll do by taking more of your money, while studiously ignoring the absolute damage done by tax increases.

The social damage per tax dollar increases as revenue levels increase, and the benefit to society from each dollar of public spending correspondingly decreases. Thus, the public interest is satisfied by adopting the optimal levels of tax revenues and public spending balancing those two effects. Economic analysis shows the optimal levels are much lower than the current tax-and-spend levels.

So, if someone uses the report for revenue-neutral tax reform — or, better, for reform to lower revenue levels — they’ll be right. If folks use it to propose net revenue increases, they’ll be wrong.

Ron Knecht is an economist, law-school graduate, higher education regent and Nevada Controller-elect.