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Friday, March 11, 2005

An Income Tax in Sheep’s Clothing

Here's the latest from Tara Ross, author of Enlightened Democracy. -- Moderator

The “conservative” Texas state legislature is on the verge of throwing away years of hard work. A new Texas state income tax—in disguise—looms on the horizon.

Two years ago, state Republican officials were faced with a $10 billion budget deficit. Despite intense and unrelenting pressure from special interest groups, Texas legislators successfully balanced the budget with reduced spending rather than increased taxes. They did something that politicians rarely do: They stood firm for small government principles. They refused to cave in to political pressure. They laid the foundation for a strong and healthy economy in the state of Texas.

Republican legislators that year were truly out of the ordinary.

Why, then, has Texas's previously resolute Republican legislature suddenly gone soft? What would cause such staunch legislators to railroad a brand-new and irresponsible tax through the legislature, quickly, before their constituents find out what hit them?

Perhaps a little background information would be helpful for my non-Texan readers.

One specific funding crisis is causing heartburn in the Lone Star State: Texas's school finance system is on the verge of collapse. For years, Texas schools have been funded by a controversial property tax system known as Robin Hood. The system requires wealthier school districts to contribute property tax funds to poorer school districts. Legislators spent the 2004 election cycle promising to get rid of Robin Hood and to reduce property taxes. The proposed one third reduction in school property taxes will cause a loss of about $5.4 billion in education funding statewide.

The $64,000 Question is obvious: How is education to be funded in the future, despite these lost property tax revenues?

Sadly, Republicans in the Texas legislature seem poised to answer the question as if they were big government liberals. They have proposed the creation of a brand-new 1.15 percent payroll tax (to be paid by employers), to cover a portion of the anticipated budget shortfall.

Republicans would make two critical mistakes if they enacted such a plan. First, they would replace a visible property tax with a hidden payroll tax. Moreover, their proposed payroll tax would be nothing but a reverse income tax on Texans--and state income taxes hurt everyone, not just a few wealthy employers.

Special dangers lurk in hidden taxes. Many taxpayers mistakenly believe that they are not sharing the burden of such taxes, and they are thus not diligent in ensuring that legislators keep these tax rates to a minimum. Legislators could likely increase payroll tax rates with no immediate ramifications at the ballot box. A small group of employers would protest, but most voters would never notice the tax hike. By contrast, when highly visible taxes, such as the sales tax, are too high, everyone notices. A hidden payroll tax, once instituted, would be virtually impossible to control or get rid of again. A straightforward state income tax (while a great evil to be avoided, in this author's opinion) would be preferable to the hidden reverse income tax that has been proposed by Republicans in Texas.

And make no mistake. This so-called payroll tax is nothing more than an income tax in sheep's clothing.

The proposed payroll tax is to be paid by employers, but the item to be taxed is the work performed by employees. And it is the employees who will most certainly bear the brunt of such a new tax when the state increases the cost of hiring new individuals.

Employees will bear the brunt of the tax when fewer jobs are available. They will bear the burden of the new tax when pay raises are less generous or don't come at all, and when employee benefits are reduced. Moreover, employees will suffer, along with their employers, when the health of the Texas economy is seriously undermined by its new tax on income.
And I have as yet to start in on Texas' constitutional prohibition against income taxes (unless such taxes are approved by a majority of voters). Doesn't this proposed "payroll" tax seem just a bit like an end-run around that constitutional protection?

Texas Governor Rick Perry is up for re-election next year. Rumors abound that Senator Kay Bailey Hutchison may return to the state to challenge him in the Republican primary. If Governor Perry really wants to win this (likely) primary challenge, the last thing that he needs on his hands is a demotivated conservative base.

And Texas conservatives will most certainly be furious with a governor who approves and signs into law an income tax of any kind.

Tara Ross is a commentator for American Enterprise and the author of Enlightened Democracy. This article first appeared as a column at


Anonymous brighteconguy said...

One thing you're forgetting is that income taxes are actually nice little automatic-regulators of the economy, making sure that the government gets more taxes when it's doing well and less when it's doing poorly. I read that in my macro text book while reviewing for a midterm next week. So Gregory Mankiw says it, and I'm pretty sure he could kick your ass.

3:51 AM  
Anonymous Blue Cross of California said...

While taxes are hitting us so hard they should be able to help out our health care costs.

11:54 PM  

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