There’s a different way to think about tax reform that the Washington opinion establishment seems to have missed. Instead of using taxes simply to raise revenues, the government could raise revenue in a way that helps reduce the need for both government and taxes.
That’s what a new organization called Redefining Progress is proposing for the State of California. We have completed the first draft of a report which details how California could shift its tax structure away from work and enterprise, and onto pollution and the use of finite resources, including land. In other words, the state would stop taxing that which should be encouraged, and tax instead activities that burden others, or lead to health hazards or eventual economic decline.
In this approach, tax avoidance would become both legal and socially desirable, and the economy would turn towards more work and less waste.
As most Americans know by now, California isn’t quite the Golden State it used to be. Words like “congestion” and “smog” are more likely to come to mind. But running through the state’s problems is a common thread that has generally been overlooked. For decades California has indulged – and even encouraged – the rampant waste of natural resources, including land. Now it is reaping what it has sown.
In this, California is an epitome of the entire nation. The tax system, moreover, has played a major part in this decline. It has penalized that which should be encouraged, such as jobs and enterprise, the thrifty use of resources and the development of inner cities. At the same time, it has rewarded things that have dug the state into its current hole, such as sprawling patterns of development and the wasteful use of natural resources.
The federal tax system provides the major push in this perverse direction, but the state and local system is pushing right behind. Current real estate taxes, for example, are especially wrongheaded in depressed inner cities. When someone improves their property, their tax assessment goes up; which means that property owners pay a penalty for upgrading their neighborhoods.
Levies to Efficiency
The Redefining Progress report aims to flip this picture upside down by showing it is possible to eliminate all current state and local taxes. Income taxes, sales taxes, vexatious business fees – could all go out the window, except for a small amount of user fees. In their place would be a series of new levies that would prod the state’s economy towards efficiency, innovation, and more use of human energies and skills.
The study covers levies on pollution, solid waste, the use of natural resources (including energy), highway use, and parking. Pollution taxes include noise as well as the harmful use of air and water. Energy taxes include a severance tax and carbon tax, as well as a risk premium for the use of nuclear energy. Resource taxes include water, timber, and fisheries.
In addition, the study shows that it is possible to abolish the existing property tax, which falls on both land and buildings, and replace it with a tax on land alone.
The draft report finds that such a shift is feasible from a revenue standpoint, and could bring many benefits. It would boost jobs, for example, by cutting the cost of labor without reducing wages. It would tend to decentralize political power by enhancing local revenue sources, and it would cut the cost of public services by fostering more compact, close-in development. The plan could also make the revenue system more fair, especially considering the economic spin-offs, such as new jobs and inner-city development.
The proposal would also reduce the need for burdensome environmental regulation. Economists have long acknowledged that the market doesn’t work well in regards to natural resources because prices for these barely begin to reflect the true costs of using them. The proposed system would start to repair that defect, thus discouraging the activities that cause pollution in the first place.
The Redefining Progress plan is an alternative direction for the tax debate in Washington. Preliminary calculations suggest that such levies could wipe out federal income taxes for American families making up to $75,000 a year ($40,000 for individuals). This would restore the income tax to what it was originally intended to be: an excise on the highest incomes. The whole economy would become an enterprise zone, in which there were low taxes on labor, and ingenuity and thrift were rewarded instead of consumption of scarce resources. This is a tax concept for where the economy is going, rather than for where it’s been.
Jonathan Rowe is program director for Redefining Progress.