Be careful with this one
The Tax Foundation’s new study is not a case for tax hikes.
- Wednesday, August 13, 2008
It's easy to imagine the glee with which Nevada's ever-higher-taxes crowd must be greeting a new study from the Washington, D.C.-based Tax Foundation, which found that Silver State residents enjoy the nation's second-lowest state and local tax burden.
One can just see the high-fiving among public labor union bosses, legislative leaders and political talking heads upon reading about the study in the Aug. 12 issue of the Las Vegas Review-Journal, which implores readers to
"[f]orget all that talk about taxes in Nevada being higher than the Himalayas." That line alone must have had corks popping in every government building in the state.
Of course, the reason this is good news in those quarters is not because it is, on its face, good news. These folks aren't thrilled because they want taxes in Nevada to be low and are congratulating themselves on a job well done in keeping them that way. Rather, they see the study as support for their argument that taxes in Nevada are too low – and that therefore, taxes must be raised. This is especially relevant today, as the battle over how to address Nevada's mammoth budget shortfall rages. Tax-hike advocates now think they have the evidence they need to blow Gov. Jim Gibbons' "no new taxes" pledge halfway to, well, the Himalayas.
Let's assume for the moment that the Tax Foundation's study is without flaw, and that Nevada's tax burden is indeed low relative to other states'. Does that necessarily mean Nevada governments are being denied their fair share of our money? In other words, does a lower-than-average tax burden mean we've got some catching up to do?
Those who answer yes start from an entirely bogus premise: that transferring money from the private sector to the government to do with it as it wishes is the best way to foster widespread economic prosperity.
Yet history teaches us the opposite is true – that societies thrive economically to the same extent their economies operate free from government control (witness the economic miracle sweeping much of the former Soviet bloc). Taxation removes capital from the hands of those with the greatest ability and incentive to spend or invest it wisely. High taxes, therefore, are a recipe for economic stagnation. If Nevada's taxes are indeed among the nation's lowest, that is a status to celebrate, and to protect. Other states should be so lucky.
Proponents of tax increases, of course, see things differently. They see Nevada's low-tax reputation not as a badge of honor, but as a wrong to be righted, an impediment to all their grand plans for utopian societal transformation. The idea that our government may not be pilfering taxpayer money as efficaciously as other governments do keeps them up at night.
But is that even the case? Do Nevadans really pay low taxes compared to everyone else?
It's a difficult question, because the answer depends on a number of factors. For example, as the Tax Foundation itself indicated and the Wall Street Journal noted, Nevadans as of last year actually carried the nation's fifth-highest tax burden when one included federal taxes in the equation. This new Tax Foundation report did not address that issue. The Nevada Policy Research Institute also recently demonstrated how Nevada's politicians have been especially adept at implementing taxes while labeling them as "fees" – as if there were a practical difference. This Tax Foundation study, however, chose to largely ignore the extent to which Nevada's many fees are simply taxes by another name.
Additionally, a review of the methodology behind the Tax Foundation study finds its author, for simplicity's sake, relied on the largely arbitrary assumption that all taxes on businesses can simply be passed on to the consumer – a point over which there is much theoretical dispute. This dispute is particularly relevant in Nevada because a disproportionate number of its consumers are from out of state. The author's approach thus has the effect of applying an unusually large share of Nevada business taxes to other states' tax burdens, rather than to our own.
We at NPRI have tremendous respect for the Tax Foundation and its generally outstanding work. In evaluating this latest study, however, it's worth considering the difficulties of trying to apply uniform economic models to all 50 states, given the many nuances among them.
More important, we should beware those who will seize upon the study as proof that Nevadans aren't paying high enough taxes. Raising taxes now would slow our economic recovery and lay the groundwork for government's next spending spree. That is precisely the approach that keeps getting us into these messes to begin with.
Andy Matthews is vice president for communications at the Nevada Policy Research Institute.
