Tax Reform Requires Wisdom and Courage

by Tom Campbell

For weeks we’ve heard the legislature will present details of a significant tax reform package. Lawmakers agree they want to lower personal and corporate income tax rates while expanding the tax base to include a wider range of sales and service taxes, but the devil is in tax reform details.

Our current tax codes, first passed in 1939, have been modified, amended and expanded so many times they are overly complicated, sometimes contradictory and are not reflective of our current economy. Over the past forty years or so there have been a half dozen or so blue ribbon studies on reform; all resulted in more talk than action. It isn’t as easy as one would think.

There are a large number of tax exceptions, exemptions and preferences, reportedly some 318 of them that would, if collected, add another 9.2 billion dollars to state coffers. Some are popular breaks, like the standard income tax deduction and personal income tax exemption, but many are industry specific, apply to nonprofits; some favor specific businesses, including economic incentives given to companies to locate or expand in our state. There is a growing consensus that most everyone will have to give something but also an acknowledgement that all will fight to keep their breaks.

Much of the public discussion has focused on the Senate reform plan. From what we have learned their plan would not be revenue neutral but would cut current revenues by some 500 million dollars and be touted as the biggest tax cut in our history. For significant reductions to personal and corporate income tax rates to be achieved there must be a corresponding increase of sales and service taxes. Senators will broaden sales taxes to some 120 categories, including most anything being taxed in another state. All businesses would be required to pay franchise taxes and sales tax exemptions for charitable organizations, such as hospitals, and nonprofits would be abolished. The deduction for home mortgage interest would end and possibly deductions for charitable donations.

While the House has been less public in their discussion they also have a plan with at least two big differences. We are told the House plan would be revenue neutral, would not lower income tax rates as much nor expand sales and services taxes as much as the Senate version. It, too, would include the elimination of the sales tax exemption from nonprofits and the exemption allowed for home mortgage interest. It is being touted as a less drastic but still significant reform package. A compromise is in order.

Lawmakers are still deciding how to present and pass these revenue reforms. If presented as a separate bill it most certainly would be bombarded by modifications and amendments that might water down the overall impact. For this reason many believe the reforms will be rolled into the overall state budget, meaning we might not see full details until it is revealed in mid-May.

The one thing on which everyone can agree is that we need to reform our tax codes. We salute our lawmakers for attempting to make our state taxes more competitive and enticing to entrepreneurs, corporations and individuals while recognizing it is a daunting task that requires more wisdom than King Solomon and more bravery and courage than Martin Luther King.