Stop Playing Favorites with the Tax Code

Abstract

The Great Recession has punched a gaping hole in state government budgets. California has a projected budget deficit of $21.3 billion for the 2012 fiscal year. Illinois has a projected shortfall of $17 billion; New Jersey’s is $10.5 billion. Texas may have a $10 billion dollar hole to fill in each year of the upcoming biennium. Fortunately, there are solutions that could not only narrow the state’s budget gap, but also reduce the distortions imposed by its current system of taxation. Tax breaks for some firms and industries necessarily mean higher tax rates for others. Keeping rules as consistent as possible appeals to our sense of equity and promotes economic efficiency. Sales taxes on business-to-business transactions are a particularly harmful form of playing favorites with the tax code by encouraging vertical integration and discouraging reliance upon outside small businesses. Eliminating sales tax exemptions and exclusions would go a long way toward solving budget problems. Via the Lone Star card system, Texas can help poor households at much lower cost. An inconsistent tax code hurts all consumers and firms, especially small businesses.