Reforming Taxes: How Congress and Idaho Can Use the Tax System to Promote Economic Growth

Jul 11th, 2017 | By | Category: Commentary

By Robert Spendlove

Robert Spendlove (1)Reforming taxes, both nationally and in Idaho has been a major issue of debate this year.  The last overhaul of the U.S. tax code was more than 30 years ago. Many lawmakers feel now is the time to take action to comprehensively modernize the tax system. However, ideas about how to reform taxes vary widely and the process for reform is fraught with difficulties.  The debate also rages on in Idaho about how to set the right level of taxation for groceries, income, and in other areas.

Why Reform Taxes?

The tax system is suffering from too many years of neglect and manipulation.  It has become too complex, inefficient, and confusing. It has many loopholes, which promote tax avoidance and tax evasion. These inefficiencies have benefitted some individuals and groups over others, which hinders economic growth. Without a concentrated effort to reform the tax code, the problem will get worse

Goals of Tax Reform

When considering comprehensive tax reform, it is helpful to consider the ideals of a tax system.  This can be represented by the acronym of the TREES of taxation.

A tax system should be:

  • Transparent – Taxes should be clear and easy to understand.
  • Revenue Sufficient – The tax system should provide for the needs of funding government.
  • Efficient – The tax system should not overburden the economy, and should not hinder growth.
  • Equitable – An individual’s tax obligation should be based on the ability to pay.
  • Simple – It should be as easy as possible to pay taxes.

The primary goal of any tax reform proposal should be to broaden the base, lower the rate, and remove credits and exemptions from the tax system. In other words, by ensuring the broadest possible distribution of taxpayers and eliminating tax avoidance mechanisms we can keep the taxes of each entity as low as possible. The Simpson-Bowles Commission on Fiscal Responsibility and Reform cited this goal as a top priority of any reform efforts.

Plans for Tax Reform Over the past several years, many proposals to reform the U.S. tax code have been introduced, including “The Tax Reform Act of 2014”, “The Progressive Consumption Tax Act”, “The American Business Competitiveness Act”, and the “Simplifying America’s Tax System” plan. 

The proposal that seems to have the most momentum is the “A Better Way” tax reform blueprint, by House Speaker Paul Ryan. The blueprint focuses on (1) encouraging greater simplicity and fairness, (2) promoting jobs and economic growth, and (3) restructuring the IRS to make it more responsive to taxpayers.

In Idaho, the Legislature debated several proposals for changing the state tax system.  These included increased taxation of online sales, increasing fuel taxes, reducing corporate and income taxes, and eliminating the grocery sales tax. 

Process for US Tax Reform

Congress has studied tax reform for several years.  The next step is for Congress to actually start moving legislation. Bills are being drafted with specific proposals and plans to update the tax system.  While Republicans control Congress and the White House, their margins are relatively slim, which means leaders will need to reach out to Democrats to build consensus for reform.

Challenges to Reform

There are many groups and individuals who benefit from the current system and will resist change.  Every tax deduction, exemption, and credit has an interest group that will fight attempts to remove them. In addition, partisanship and politics will influence any reform attempts.  For instance, progressive groups will argue that the tax system should focus on an equitable allocation and an individual’s ability to pay.  Conservative groups, on the other hand, will resist any reform proposals that result in tax increases.

Idaho is a perfect example of why tax reform is so difficult to implement.  One by one, each of the ideas to reform or reduce various taxes were set aside.  Ultimately, the Legislature was only able to build enough support to eliminate the grocery tax, along with the grocery tax credit.  Then Governor Otter vetoed the bill in an attempt to kill the proposal for this year.

What’s Next?

The success of comprehensive tax reform will depend on whether Congressional leaders are able to overcome opposition by special interests and implement fundamental changes.  The window of opportunity could be relatively small, since we will enter the early stages of the 2018 midterm elections in the next few months.  If Speaker Ryan and other leaders aren’t successful this year, it could be a long time before tax reform is possible.

In Idaho, the issue of reforming taxes remains unresolved.  The majority of Idahoans oppose the Otter veto of bill removing the grocery tax and tax credit.  The state Supreme Court may address the Constitutionality of the timing of the veto, but the underlying issue of modernizing the state’s tax system remains.  Expect to see more debate and discussion of this issue in the coming months.

Robert Spendlove is Economic and Public Policy Officer for Zions Bank. To contact Robert, email Robert.Spendlove@zionsbank.com.

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