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BOE Member Bill Leonard on Tax Increases

Flashreport.org features a guest commentary by BOE member Bill Leonard. His main point is that revenue should not be viewed as static such that an increase in the tax rate will directly lead to a proportional increase in revenue. Rather, revenue is dynamic and higher taxes effect behavior limiting the gains in revenue:

George Skelton’s column earlier in the week credited Pete Wilson for a $7 billion tax hike in the early 90s. What Skelton left out is that less than $5 billion of what was promised actually came in, and one of the worst recessions in memory was exacerbated. Although it is common sense that people change their behavior in response to changes in the price of goods, the taxpayers’ response to new taxes is not factored in when revenue forecasts are made. These static estimates assume people are like cattle. The tax-hike proponents just whip out a calculator and multiply the tax hike by the number of people, and voila, that is their revenue number. This utterly ignores reality. In fact, the revenues from the Wilson tax hike came in 20 percent short of expectations, or $800 million short, the first year after the hike. Even as the economy recovered, revenues still came in short of forecasts by half a billion per year for several years.

Now Perata is promising $5 billion from a one-cent increase in the state’s sales tax rate. Unlike a static model, a dynamic revenue model factors in the response of taxpayers to changes in price. The Department of Finance has the ability to do dynamic modeling, but rarely makes that information public. I have a dynamic revenue model from the Department of Finance that shows an 8% decrease in revenue for every one-cent hike in the sales tax rate.

Read the whole thing, he makes several other important arguments.

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