Georgia tax-reform flop offers lessons for Washington

For a country with a spending problem, we sure are hearing a lot about taxes.

Tax reform features in the long-term budget-balancing plans of House Republicans and a couple of high-profile bipartisan commissions. (Even if President Barack Obama’s idea of tax “reform,” judging by his speech yesterday, is simply to raise taxes on “the rich.”)

If we’re going to get tax reform from Washington to go with spending cuts and changes to unsustainable entitlement programs, let’s hope the feds have been paying attention to the failed — for now — reform efforts in Georgia.

And the primary lesson from Georgia is that would-be reformers get off-track when they forget the principles that got them started in the first place.

Those principles are the same here as they are in the various plans coming from Washington: Broaden the base. Simplify the structure. Flatten and then lower the rates.

The idea is for more people to pay lower rates on more of their income. If that sounds murky as to whether taxes would go up or down, you’ve identified the first pitfall.

Many of the numerous deductions and credits are ways for lawmakers to reward narrow groups or activities. It’s political favoritism — a way to subsidize the purchase of things like hybrid automobiles.

Even when deductions cover far more people, as with mortgage interest or charitable donations, it would be better to eliminate or greatly reduce them and make up the difference with lower rates.

Problem is, people like to be subsidized for choices they want to make, even — or maybe especially — if they were going to make those choices anyway. When elected officials start talking about tax reform, deduction recipients often balk, as they did in Georgia.

The key is to lower the rate enough that complaints about “tax hikes” don’t stand up to scrutiny. But the more deductions and credits kept in the tax code, the less dramatically the tax rate can fall.

That was the second pitfall officials in Georgia encountered. By the time they maintained the most popular deductions and credits, they were left with a rate cut only half as big as the one initially envisioned. Compared to cutting rates to 3 percent (from 6 percent), going to only 4.6 percent hardly seemed worth the trouble.

Once Georgia’s lawmakers accounted for these pitfalls, they were left with a plan that had little support among the public or their colleagues in the Legislature. The result: Tax reform for the state is on ice for several months, at least.

But I still believe that, had reform proponents stuck more closely to those original, overriding principles and taken the time to explain them, as well as the results of the changes they wanted to make, they could have produced a plan that would have been both popular and economically sound.

Of course, Georgia lawmakers were committed to ensuring the total package was revenue neutral, if not an overall tax cut. In Washington, some reformers want to increase revenues to close the budget deficit or pay down debt.

The question is the same as always regarding taxes: What would we get for what we pay? I don’t think the public will go for higher taxes just to close the annual budget deficit — not when we’d nearly balanced the budget in 2007 at the current tax rates.

Paying down the long-term debt might be another matter. But there’s a trust gap: Even if Washington says extra revenues will go to reduce debt, many Americans will be skeptical, and rightly so.

If Washington can find a way to make it irreversibly certain that surpluses would go toward debt, we can talk. Until then, better to identify sound reform principles and stick to them.

– By Kyle Wingfield

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