Tax Myths, Tax Dilemmas

October, 2017

Lincoln and Washington -- The President and Congress are now working on tax legislation. They would be well-advised to listen to a Reagan Administration advisor who put together the Kemp-Roth* tax cuts in that era, Bruce Bartlett. He cautions against assuming that tax cuts result in economic growth, as the record of three subsequent decades does not provide empirical evidence for it. Of course there are many excellent economic studies that make the same point, but seldom does the advice come from a Reaganite tax cut warrior.

Nebraskans should be especially wary of the federal tax provisions advanced by the Administration. Nebraska is a high property tax state; losing the deductibility of these taxes would hurt. Also, Nebraska piggy-backs its state income tax on federal income tax liability. If federal liability goes down, what does the state do, adjust its rates upward to bring in the same amount of revenue? (If anyone has asked Governor Ricketts about what he would recommend, I'm not aware of it.) Nebraska's revenue from income taxes is already taking a nose-dive because of extreme weakness in its agricultural economy. If there is even less state revenue, more pressure will be placed on property taxes to fund local governments like schools and cities.

The simplistic answer from many Nebraska politicians when faced with this dilemma will be to say "just cut spending." (By the way, we've seen what this approach does in areas like the Department of Corrections, and it is frightening.) I take a back seat to no one in advocating cuts to wasteful government spending at any level – local, state, or federal – and have a record to show for it. But sometimes waste is worst on the tax expenditure side of the budget at the federal level, in the form of tax giveaways that only increase federal debt for no good purpose and exacerbate problems at the state and local level.

The Administration's tax cut proposals are half-baked, to say the least. There is a strong case, however, for tax reform and simplification, on both the corporate and individual levels. That's where the evidence is strong, and should be the direction Congress takes.

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*I was working in the Senate when Kemp-Roth was considered. Senators Bill Bradley and J. James Exon were skeptical of the claim that three years of successive tax cuts would increase revenues, but were willing to put so-called supply-side economics to the test. Accordingly, we devised the Exon-Bradley Tax Trigger Amendment. If the enacted cuts worked as Kemp-Roth proponents promised, spurring growth and revenues, all the tax cuts would go into effect as scheduled. But if after several quarters of being in effect, the Kemp-Roth theory was not working, the last of the cuts would be rescinded to avoid increasing the federal deficit. The Exon-Bradley Amendment got over three dozen votes but was defeated. However, the Reagan Administration itself soon reversed course and asked for tax increases to undo much of Kemp-Roth, as belatedly explained by Bruce Bartlett in the linked article, above.