The Chicago City Council passed Mayor Daley's budget yesterday, which included a five-cent tax per unit of bottled water sold in the city, in addition to a fairly large property tax hike. From the Chicago Tribune:
Brushing off a rare show of opposition, Mayor Richard Daley won easy City Council approval Tuesday of a spending and tax plan that will tap into the wallets of just about everyone who lives, works or plays in Chicago.
The package, which takes effect Jan. 1, includes the biggest property tax hike of Daley's 18-year tenure as well as higher taxes on beer, wine and liquor, a new 5-cent tax on bottled water and increased water and sewer fees.
The most controversial item was the $86 million property tax increase, which passed on a vote of 29-21.
So why did the council enact a five-cent tax on bottled water? Is it defensible under any principle of sound tax policy? Is it defensible as a Pigouvian tax? It may or may not be, but the mayor didn't really care about that either. There was no study shown supporting such an optimal Pigouvian tax. He just wanted to raise revenue via an arbitrary tax source that has no justification to be used as a general revenue source. And if you can believe this, another reason that was actually cited in a previous article when this issue was first being debated was that the city was upset that people were buying bottled water and not purchasing the water via the city's monopoly on tap water. Unbelievable.
Also, you Bleacher Bums at Wrigley Field will be paying more for the beer you drink next summer as this new plan also raises taxes on alcoholic products. Maybe a tax on Baby Back Ribs is next.
There are many stories of bad fiscal policy proposals that we often read about and comment here. But there are some stories that just write themselves. From the Associated Press:
Birmingham Mayor Larry Langford is getting lots of questions from the Birmingham City Council about his proposed tax hikes and revitalization plans.
His proposals include doubling the business license fees and a one percent increase in the sales tax. Langford said the money would help fund a domed stadium, transit system, scholarship programs and police department among other things. Yesterday, the new mayor met with council members to answer questions about his plan.
The city council today is expected to set up a series of public hearings before it takes a vote.
A taxpayer-funded domed stadium for Birmingham, Alabama? Is Birmingham going to try to lure professional sports teams besides arena football and minor league baseball to an area that has fewer people than Richmond, Virginia? And even if it were successful at luring a team, would this produce any net economic benefit, considering the opportunity cost-that is, considering the other things that money could have been spent on, especially given that it is partially funded by taxes on business licenses? Not likely, despite what "economic impact" the mayor may claim.
Or will the city try to get the annual Auburn-Alabama football game to come back to Birmingham? The revenue impact of that single game per year would not even come close to paying for a new domed stadium. And how willing would the two schools be to give up their biggest home game every other year to play in a dome? Plus, how many football stadiums does one area need? Currently, Birmingham has Legion Field, which is where UAB plays. It holds about 71,000 people. And there is a newly refurbished 92,000+ seat football stadium located about 50 miles from Birmingham in Tuscaloosa.
Raising taxes on businesses and consumers to pay for sports stadiums is quite possibly the worst fiscal policy decision local governments can make. Unfortunately, they keep giving handouts in the name of sports, despite the fact that public finance experts who are both conservatives and liberals despise such corporate welfare.
Kentucky Senator Jim Bunning (R), who is also a member of the Senate Finance Committee, has called for a repeal of the alternative minimum tax (AMT), arguing that it hurts too many "ordinary Americans." From the Lexington Herald-Leader:
U.S. Sen. Jim Bunning said Tuesday he has introduced legislation to repeal a tax originally targeted at the wealthy but that now affects millions of middle-income people.
Bunning, R-Ky., said he's co-sponsoring a bill that would do away with the alternative minimum tax.
"It's really hurting the every day, ordinary American severely," Bunning told Kentucky reporters during his weekly conference call.
The article closes with this statement from Sen. Bunning:
"There are a lot of us that think we should repeal it and charge it off, not pay for it. In other words, not increase taxes on other people, or taxes on businessess...to pay for a tax that was never intended to affect the taxpayers it is affecting right now."
Despite what Sen. Bunning or other politicians, both Democrats and Republicans, are saying, AMT is not currently "hurting the every day, ordinary American severely." In five-to-ten years if nothing is done, that might be true. But even with the 23 million taxpayers who are set to pay AMT this year if nothing is done, virtually all of them are in the upper half of the income spectrum, and most of them are in the top 25 percent. That doesn't mean nothing should be done to prevent a scheduled increase in taxes from 2006 to 2007 on these people, but politicians should be honest in who they claim to be helping.
Now if taxpayers are rationally forecasting their expected future tax bills and thereby reducing their consumption today, then maybe Sen. Bunning's statement that this is currently hurting the "every day, ordinary American" would apply. But under that circumstance of rational forecasts, these people may not be helped by Sen. Bunning's solution, which is to just "charge it off" and let the deficit pay for it. If people are rational and are forward-looking, any deficit financing of a tax cut today is going to be paid largely by those same people down the road or their descendants, whom they supposedly care about, depending upon their expectation of what the future tax distribution would be along with their future individual circumstances. So in other words, they would bear the burden today. This is the famous Ricardian or Barro Equivalence.
Now if the individual does not care (in his utility function) about the tax burden of his descendants, then he would not bear the burden of the deficit. However, that would still make Sen. Bunning's statement of "not increasing taxes on other people" incorrect, because individuals born 20 years from now are still "other people."
It seems like every day now we are hearing that the real estate bubble has burst, lenders have tightened up and that thousands of people are having their properties foreclosed... Continue Reading:
In April, residents of Doña Ana County, New Mexico (home of Las Cruces) voted 50.7%-49.3% to approve a 1/4-cent sales tax increase to part fund construction of a $198 million space vehicle launchpad. (Additionally, one-quarter of the tax revenue goes to "spaceport-related education in local schools.") Local boosters hope the spaceport will attract the space industry to the area. Tax collection is scheduled to begin January 1, 2008.
Or maybe not. Under the state law providing additional funding, three counties were required to enact taxes and contribute funds. The other two counties, Otera and Sierra, have yet to even schedule election dates. Because it is doubtful that a tax would even pass, some Doña Ana County residents are reluctant to begin paying a tax that cannot, and may never, be spent.
Doña Ana County Manager Brian Haines told commissioners last month he wouldn't feel comfortable collecting the tax if there was no way to spend it. If the district never forms, the county would be stuck with a pool of money that it wouldn't know what to do with, he said.
However, officials aren't sure whether they can unilaterally delay the tax's collection. Sounds like Doña Ana County put the cart before the horse without a backup plan. Careful thinking can sometimes go out the window when local and state governments seek to use tax money to attract industry, such as by building stadiums, office parks, or even credit card call centers. Taxpayers could end up with the worst of both worlds-paying taxes that can't be spent on a project that, even if built, might not live up to all the stratospheric expectations people have for it.
As we put it in our 2008 State Business Tax Climate Index summary:
Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business climate plagued by bad tax policy. A far more effective approach is to systematically improve the business tax climate for the long term.
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