By Anna McCauslin
Background – Revenue and Rebates are Everywhere
Many lawmakers desire to pass along unusually high general budget surpluses to taxpayers and for good reason. They also recognize that general fund revenue comes from taxpayers, and when necessary governmental functions are funded, want to return it. State general fund budgets will likely continuously grow over time but should not outpace the private sector. Whether it’s a single spike in revenues or several years of unexpectedly high growth, does it matter how lawmakers choose to send that money back to the individuals that earned it? The answer is “yes” and the remainder of this article will explain why.
Tax rebates are not a new concept. Several states and the federal government have used rebates to send tax revenue to specific groups of people. However, it was unprecedented at a national level that a wide swath of the population would receive a rebate. That was until COVID safety compliance measures forced many into unemployment which for a short time caused many state budgets to constrict. The federal government stepped in to provide direct rebate payments to individuals and sent hundreds of billions to state governments. The final COVID bill, the so-called American Rescue Plan Act unnecessarily sent money to states. State budgets quickly turned around and many states were flush with state general fund revenue surpluses as well as federal funding. While federal funding, especially that from the American Rescue Plan Act, cannot be used to reduce taxes or sent to the taxpayer, general fund revenue surpluses should be put to good use.
Governors or legislatures in Idaho, George, Indiana, New Jersey, New Mexico, California, Hawaii, Maine, Minnesota, New York, and Virginia have proposed or enacted a rebate this year. While these measures are less familiar to residents in most states, residents in Alaska and Colorado are accustomed to established protocols for receiving returned tax revenue. Alaskans receive a Permanent Fund Dividend each year, and Coloradans receive tax refunds in various forms depending on the Taxpayer Bill of Rights formula. But the question remains, what is the best way to use revenue surpluses and return excesses to taxpayers?
Best Practices for Excess Revenue
The best use of one-time revenue surpluses, which are unstable and should not be used to fund ongoing projects, is to ensure that rainy day funds are amply filled in anticipation of the next downturn. When that is achieved, state legislators should look to pay down debt such as unfunded pension liabilities. Any money that is leftover should be sent back to the taxpayer. Given the current state of high inflation, legislators from across party lines are looking to do so.
One drawback to rebates is the erosion of the concept of how money is earned in the mind of the worker. Money is earned from work, not from the government. When the government has money to give, it is because it has removed that money from the economy through taxation, fees, or fines. It is better for the government to have a stable and less volatile form of revenue, eliminate unnecessary programs, and when excess revenues exist, lower or eliminate the most distortionary taxes first.
Ideal Tax Reform for Future Economic Growth
The same principled thinking used for tax reform should also apply to sending revenue back to constituents – it should strive to be simple & transparent, neutral, equitable, predictable, and permanent. This means that taxpayer dollars should be returned to as many people as possible, not specific people groups to garner political favor.
- Simple and Transparent: Tax policy should be clear and simple as possible – expensive lawyers and accountants shouldn’t be a prerequisite for individuals and small business owners to calculate their tax liability. Also, convoluted and complex tax laws create perverse incentives for avoidance, using tax shelters, complex accounting, and similar business practices.
- Neutral: The point of taxes is not to control constituent’s behavior. Tax policy should be neutral, with a broad base, and a low rate, which avoids high tax rates and incentivizes businesses and families to move to lower-tax jurisdictions. Special interests also would not have the incentive to lobby for carveouts and exemptions if corporate taxes, where they are enacted, would be low and equally applied.
- Equitable: Corporate welfare and special-interest handouts create winners and losers. Likewise, one-time rebates, credits, and deductions that target specific groups of people also create winners and losers. Everyone should pay their tax liability, at the same low-flat rate. Nothing more and nothing less.
- Predictable and Permanent: If possible, tax reform should be long-lasting as a strong, pro-growth economy requires certainty. Temporary tax policies should be eliminated. Predictability is important for business owners, individuals, and the state general fund budget. If taxes paused for one subset of the population, it would fall on others to make up for the decrease.
One-time rebates are examples of poor tax policy but are preferred over permanent expansions of government programs. Any change in taxation requires forethought, including possible negative outcomes, not a quick response to previous poor governmental decisions.