The Grassroots Corner April 19, 2021

HOSTILE ARGUMENT: STATE AND LOCAL TAXES WILL SKYROCKET

This Grassroots Corner continues a series on dealing with hostile questions and comments that people may raise about the FAIRtax. Many of these suggested responses will be good comebacks for you to have in your pocket – or purse – when you need them. You may have heard some of these questions and answers on The FAIRtax Guys podcasts and radio programs. Some stress questions here will be different.

Some of these suggested responses can be too long to insert into an actual conversation.  You may want to boil them down to where they'll be more useful when you're talking face-to-face with someone attacking the FAIRtax.

This week, we take on the criticism that state and local taxes will skyrocket because the FAIRtax makes state and local governments pay tax.

It is true that the FAIRtax, makes state and local governments pay tax on their consumption, including wages of their employees (these are considered purchases of personal services) and items they buy. There is an exception for “government enterprises” such as the Postal Service or Amtrak, but the Postal Service and Amtrak don’t collect taxes from you.  The federal government also pays tax on its consumption, but the FAIRtax builds that cost into its 23% tax-inclusive rate.

Why does the FAIRtax make state and local governments pay tax? Consider a tale of two cities. In Summit, New Jersey, the local government provides garbage collection, but in Westfield, New Jersey, the local government makes residents pay private haulers. Under the current tax system, it makes little difference who the entity is that provides garbage collection. New Jersey does not tax the service.

Under the FAIRtax, Westfield's private garbage haulers would have to charge their customers the FAIRtax, while Summit passes its internal FAIRtax costs for garbage collection on to its residents. The result seems to be pretty even.

Let's change the FAIRtax for a moment and take away tax on the government. How would Summit and Westfield fare now? Summit could buy its trucks - and the fuel to run them - tax-free, and it would not have to pay tax for its haulers’ services. Westfield’s private garbage haulers would still have to charge their customers the FAIRtax.  In that scenario, Summit garbage collection would have an unfair tax advantage over Westfield.

When Westfield voters learn that Summit can provide the service less expensively, they would fire their private garbage haulers and have their town provide garbage hauling – just like Summit.

This effect would repeat itself at state government. The New Jersey Department of Transportation would fire its contractors and hire its own road crews.

To equalize the tax treatment between government-provided services and privately-provided services - and stop flight away from privatization - the FAIRtax taxes government consumption. So, when Summit pays tax on its trucks, fuel, and hauler’s services, its costs more closely resemble Westfield's private garbage haulers' costs to the end user. There is no longer an incentive to switch to government-provided services - which tend to be less efficient.

Will taxing state and local governments bloat their budgets, forcing them to pass the increase on to you? Maybe. But consider these facts:
 

Is it constitutional for the federal government to make state and local governments pay tax? The U.S. Supreme Court decision in South Carolina v. Baker (you can look it up at 485 U.S. 505 [1988]) may be an indicator. In South Carolina, the federal government took away the income tax exemption for interest on state-issued bonds - unless the bonds were in registered form. One of South Carolina’s arguments was that the feds violated the Tenth Amendment to the U.S. Constitution, reserving powers to the states and people.

The Supreme Court decided in favor of the feds. According to the Court, the owners of state bonds have no constitutional entitlement not to pay taxes on income they earn from them. And States have no constitutional entitlement to issue bonds paying lower interest rates than other issuers.

Transposing the South Carolina reasoning to the FAIRtax, state employees have no constitutional entitlement to avoid paying tax on amounts they charge for their services. States have no constitutional entitlement to pay their garbage haulers, road crews, and materiel suppliers less than a private contractor paying FAIRtax would have to pay - tax-inclusive. The FAIRtax is nondiscriminatory and, as it relates to making state and local governments pay tax, should survive a constitutional challenge.

Government consumption is about 18% of the total FAIRtax base. The feds pay about 10% of that tab, and the remaining 8% falls on state and local governments. Without the revenue from state and local governments, the FAIRtax rate presumably would need to be about 8.7% higher.

So, perhaps state and local taxes would go up with the FAIRtax, but the cost of state and local government would still be more affordable if we had it.

I would love to hear from you about how to squeeze this explanation into a soundbite.

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