Finance

Wallets, Recessions and Tax Commissions

In a bad economy, is a tax commission likely to have more of an impact?
by | June 23, 2010
 

The alarm came in a letter from a law firm to its business clients in Georgia: "Hold onto your wallets," it suggested. Georgia's Legislature was about to vote on a bill to appoint a tax commission and, the letter warned, "this bill holds sweeping implications for all Georgia taxpayers, but particularly any business with operations or interests in the state. Whenever tax reform surfaces, businesses should prepare to secure their wallets and safeguard their bottom lines."

Tax commissions are not something new -- or usually dangerous to anyone. For the most part, their findings tend to gain little attention.

But this time around, that assumption may be off. This recession has been deeper, harsher and more debilitating to all state and local tax revenues. And that falloff coincides with a growing awareness that state tax codes, even at their robust-economy best, are not in step with the 21st century's economy. Does that mean that recently named and about to be named tax commissions -- Georgia is not the only state to appoint one -- will have more of an impact? Do taxpayers, in short, need to hold onto their wallets?

I put that and a few other questions about tax commissions to Bill Fox, professor of economics at the University of Tennessee. Fox is an expert in state and local taxes and has written papers for or served on tax commissions around the country. Here are some of the points he makes.

Is one tax commission pretty much like another?

They vary. They can be set up to look at the entire tax structure or be narrowly focused. Massachusetts had a tax commission in 1992 that looked at one aspect of a bank tax. North Carolina has a sales tax study going on. Most states set up commissions because some specific concern exists -- although Hawaii has a statutory requirement to appoint a tax commission every five years.

My guess is that if you went back and looked at tax commissions over time, there would be a correlation between recessions and tax revenue's poor performance. A commission draws attention to the tax situation. Right now, the recession has plummeted revenues, and everyone -- legislators, governors, policymakers -- thinks if they tinker with the tax system, this wouldn't happen again. That's an unreasonable expectation. There aren't taxes that would have seen states through this last recession without fiscal problems. That doesn't mean they couldn't do some tinkering to make the recession less severe.

What kind of signal does setting up a tax commission send?

In many cases, it's a serious intent to take a careful look at tax structures to make sure the policy the state is implementing is the best policy. In other cases, it's just a way to move the budget process forward and get agreement from those who would like to do a study or like to have reform without actually implementing anything. You have to know the politics of a particular place as to what kind of signals are being sent.

To answer the "hold onto your wallet" point, though, most commissions are not in the business of recommending tax rate increases. Most focus on structural issues. There might be some relatively neutral changes -- someone's taxes get cut and someone's increase. The notion that a commission might try to go after business taxes wouldn't be shocking in this setting. On the other hand, there have been a lot of efforts to enact business concessions during recession.

Every state has things in their tax structure that could benefit from a careful analysis. If states are willing to take a serious look at structure and any concerns economists have -- more efficient collection, less of an effect on economic development, more stable tax revenues -- and are willing to make reforms that deal with these issues, this is a great time to do so. People's attention is focused on it. At the same time, you're not going to find painless ways to raise taxes. Expectations need to be set right.

How do you measure a tax commission's success? Is the passage of tax reforms the ultimate measure?

Many commissions are made up of serious people who make a serious effort. Their work shouldn't be judged by whether they have immediate success. A lot of the function may be just to educate legislators and the public. You may need to do education first and let that sink in so you can do reforms over the long term. I wouldn't necessarily expect there to be immediate change because a tax commission said it would be a good idea to impose, say, a sales tax on particular services. That probably doesn't bring all the political forces together to bring about change. But the next time it's discussed, it might be at the top of the list. Ideas percolate over time.

In the case of Hawaii, I wrote a study around 1990 on general excise taxes and I would say some of the things I recommended were implemented within 10 years. I'm not taking credit -- legislators and policymakers deserve the blame or credit. But they implemented a number of things the commission talked about. So in Hawaii, the commissions are not just an academic exercise.

There can be commissions or groups to study an issue and not do anything. A commission report gives you time to think about what's good and bad. Education -- of legislators and the public -- takes place. People understand issues better. Most legislators are not tax experts. They have a whole waterfront of things to deal with. Taxes are only one. You can't judge the effectiveness of a tax commission by looking at just the next year or two.

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