As legislators decide the fate of a bill that would put up for a vote this fall a change to the state constitution lowering the cap on the income tax rate from 10% to 5.5%, one of the arguments against such a cap is that it would limit revenue options during economic recessions.
But maybe that’s a good thing, because as past history has shown, legislators like to exploit recessions as an opportunity to impose “temporary” tax hikes that end up being not so temporary.
Take for instance the case of the 2001 recession. A more thorough analysis can be found in the 2018 Budget & Tax Highlights Guide, but here is a brief rundown of those “temporary” taxes passed under the guise of filling revenue gaps during a recession.
- Statewide sales tax was increased by 1/2 percent, scheduled to sunset Oct. 2013. This was extended twice and in 2006 1/4 cent of it was made permanent
- A 1/2 cent local option sales tax was approved, which was made permanent
- Overall, the sales tax was increased by 3/4 of a cent permanently – supposedly in response to a ‘temporary’ revenue need
- the top personal income tax rate was increased from 7.75 to 8.25, scheduled to sunset in 2004. This was also extended twice and finally allowed to sunset in 2008 – four years after originally promised
All told, extending and making permanent a portion of these “temporary” taxes cost taxpayers $2.03 billion from FY 2003-4 to FY 2007-8. And such “temporary” taxes certainly were not needed, as the economy had recovered and was growing rapidly during these years. Indeed, the extra taxes just fueled unsustainable spending growth, as the state budget ballooned a whopping 39 percent in just those four years.
Of course, we all know what happened in 2008-9.
Legislators’ own history shows they can’t help themselves. Increasing taxes during a recession not only makes the recession worse, but proves to be difficult to eliminate. Once legislators find themselves a new or increased revenue stream, they are loathe to give it up. And the increased revenue just fuels more budget growth, which deepens the crisis the next time recession hits.
This is another reason why the constitutional amendment is needed.
