Friday, July 6, 2007

Do Your Math on the Sales Tax

Although the title of this blog, AP, refers to the politics of the city of Annapolis, from time to time state issues make their way onto these pages, as the state capital is indeed here as well.

So, the state budget issue goes something like this. Ehrlich came into office facing a budget deficit, then turned it around and left a $1 billion (fact check needed) or so surplus for O'Malley. O'Malley blew through that money in his first year, and now the state has no money, so they say. Politicians are now talking about what they call the 'doomsday budget', and telling us that if they don't raise taxes we will be cast back to the stone age because our schools, police, fire, and other services will just stop working. They are buttering us up for a HUGE tax increase next year, which is what happens when you have the executive branch and both houses of the legislature controlled by liberals. Note to readers: WE DO NOT HAVE A BUDGET PROBLEM, WE HAVE A SPENDING PROBLEM. REPEAT, A SPENDING PROBLEM!

Please read this article, in which Senate President Miller and House Speaker Busch talk about the budget and raising taxes. I am having you read this now, so next year, when all of this actually happens, I can make a cheeky 'I told you so' post on this site.

I am now going to quote selected excerpts from the article, and give you the no BS translation as to what this really means.

The sales tax is estimated to bring in $3.6 billion in fiscal 2008, according to the state. A 1 percent sales tax increase would raise an extra $750 million.

I hope you all like pop culture, because we are now going to play 'Are You Smarter Than A Fifth Grader?'!!! If the original value is 5, then it goes to 6, by what percent does it increase? Well, it's (6-5)/5 = 1/5 = .2 = 20%. THIS IS A TAX INCREASE OF 20%, NOT 1%. IT IS A 1% INCREASE OF THE VALUE OF THE GOOD, AND A 20% INCREASE IN WHAT YOU ARE PAYING. Let's use some numbers. Say you buy a car for $20,000. Now, you pay $1000 in sales tax. With a 6% sales tax, you would pay $1200. First, notice that this is a lot of money! Second, notice that you paid $1000, you now pay $200 more, and that is a 20% increase. This also means that the state will see A 20% INCREASE in sales tax receipts. Please write the papers when they call this a 1% increase.

But any sales tax hike would be part of a broader "menu" that would first look to cut state spending, reduce aid to local government, and then fill the remaining gap with new revenue, Mr. Busch said. Lawmakers have a duty to not unduly burden middle and lower class families with high taxes, he said.

Menu? A f_ _ _ ing tax MENU??!!! Let's get something straight, taxes are where the government (i.e. your neighbors who you elected) takes YOUR MONEY and gives it to SOMEONE ELSE for any reason they want. Democrats and liberals, you can now observe, see this as a natural part of life. They choose from a menu--a comprehensive list of dozens, perhaps hundreds, of ways to take your money. When one way produces less money, or invokes criticism, they just order something else from the menu. Also, remember Mr. Busch's promise not to burden middle and lower classes with higher taxes. First of all, rich families are apparently supposed to be unduly burdened with high taxes. And second of all, I promise you that he will raise taxes for EVERYBODY.

Last session, a bill sponsored by Del. Jim Gilchrest, D-Montgomery, would have taxed services ranging from auto repair shops and parking facilities to tanning salons and escort services.The legislation projected that state revenues could increase by more than $300 million in fiscal year 2008 and go up to more than $760 million by fiscal 2012.

I own a service based business in Prince George's County. What do you think will happen if I have to start paying sales tax (even though I am not selling anything). The cost pressures I face will cause me to either raise prices or decrease the quality of service, or put employees out of work. Somebody else, in another state right next to me, will come in and offer a better value and take business from me. Not only is this idea obviously bad for in-state businesses like mine, IT IS BAD FOR THE STATE ITSELF. This reasoning is a spin-off of the famous Laffer-Curve analysis of the optimal tax rate, which states that at some particular tax rate, an increase in that rate will actually cause a decrease in government tax revenue. Here's how: increases in tax rates increase the tax revenue per dollar of economic output (or GDP), but decrease the actual output itself. In my example, my income goes down because of the competing company who takes business from me. So, the state makes more money on each dollar of profit I make, but that profit is lower than before. At some point, the loss in profit outweighs the increased portion of tax I pay on the profit I still make, and the government therefore ACTUALLY LOSES MONEY BY RAISING THE TAXES. Not to mention, higher taxes may cause me to lay off employees because I can't afford to pay them, so the state loses this employee's income tax, and payroll taxes that I pay on the employee's salary.

I was recently denied admission to the University of Maryland PhD program in economics (who DO they let in? I graduated UMD cum laude in economics, started a freeking business at UMD, and was Young Entrepreneur of the Year. Geez.), but I have put a call in to my personal friend, the Dean of Behavioral and Social Sciences, to see if there is a data-based, calculated optimal tax level (an actual number, say 5.5% sales tax) that would maximize revenue. Conclusion: keep taxes as low as possible and let the private market do it's job.

Regardless of potential backlash, Mr. Miller said, lawmakers must have the political will to tell people what they need to hear, not what they want to hear.

Ha! Translation: lawmakers will tell us they are raising taxes no matter what and we can't do a damn thing about it even if we have a better solution or the majority of us don't want higher taxes.

If anybody wants to start a sister site, perhaps, (do not click here, it is not a real site), let me know and we can get together!