Some State Budgets Look Troubling for Taxpayers

Ross Marchand

February 1, 2017

Only ten weeks ago, taxpayers flocked to the ballot boxes to win a respite from the tired tax-and-spend proposals of federal and state politicians. Any celebration seems to be premature, though, as governors of all political stripes unveil expensive budget proposals for the coming year. New York Governor Andrew Cuomo (D) is among the biggest offenders, laying out what the Buffalo News calls a “cornucopia of tax and fee hikes.”

Exhibit A of this tax smorgasbord is an audacious attempt to bailout three nuclear power plants.  Cuomo’s plan would cause a rate increase for New York electricity ratepayers.  Taxpayers will also be on the hook for an increase in electricity costs for public buildings.  Another misguided idea is to expand sales taxes on products sold on the internet, regardless of the physical location of the seller. The Governor claims that the expanded tax would increase revenue by more than $200 million in the next two years, but this math fails to take economic incentives into account. Unlike older shoppers beholden to their favorite brick-and-mortar locations, younger web-savvy customers can easily ditch large internet marketplaces (like Etsy) in response to a tax hike. The biggest losers will be fledgling digital entrepreneurs, who sell their products on well-known internet venues to avoid large fixed expenses like rent.

The Governor also plans on slapping a 10 cent-per-mL tax on electronic cigarettes and vapor products, hoping to reel in around $5 million a year. This reckless move threatens public health, by making it harder to obtain products that aid in the process of quitting smoking. An August 2015 Public Health England review of the available evidence concluded that e-cigarettes are 95 percent less harmful than regular cigarettes, and can thus be a potent harm-reduction tool for heavy smokers. Taxing these products into -oblivion would thus likely carry substantial long-term health-care costs, something that the Governor’s budget conveniently omits. Increased taxes on tobacco products rarely raise the revenue projected. In fact, there are cases where revenue is lost after tobacco tax increases.  New York lost $400 million in revenue over 5 years after implementing the highest cigarette tax in the United States.

Ill-conceived tax proposals are hardly limited to Democratic executives. Maine Republican Governor Paul LePage recently unveiled his own tax hike bonanza. In addition to punishing residents for getting haircuts and going to the movies, LePage seeks to gauge providers of digital streaming services such as Netflix, Hulu, and Amazon Music. These taxes, which will inevitably be passed along to customers, have consequences beyond making leisure less affordable. Streaming services are a powerful antidote to online piracy, a practice that robs artists and decreases incentives to produce great work. Streaming subscribers that find these new taxes to be too onerous will be lured to “gray websites” of dubious legality.

In addition to the immeasurable harm caused by increasing piracy, these unintended consequences will mean less-than-estimated revenue. Consequently, the legislature will likely have to raise taxes on more tangible items to meet spending targets. Taxes on incomes will already increase by three percentage points by the end of the decade, as the result on a recent referendum. Maintaining some of the highest state tax rates in the nation will only result in more capital flight and a smaller tax base. As the Tax Foundation has documented, increases in income tax coincide with migration to lower-tax states.

Instead of decreasing living standards through increased taxation, governors and legislators should keep tax rates low and manageable. To accomplish this, spending initiatives will need to be correspondingly modest and spending cuts will have to be passed. While repairing infrastructure and caring for the indigent are reasonable government functions, subsidizing corporate projects is unwarranted. Good fiscal reform also entails “dynamic thinking,” in which the unintended consequences of tax-and-spend measures are taken into account.

Tax hikes often cause residents to switch their behaviors, rendering revenue projections moot and causing economic distortions. Minimizing government interference in the economy and instituting spending cuts are the best ways to maximize revenue over the long-run, and ensure that the basic needs of state residents are attended to. The opposite approach will only result in more fiscal misery.

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