Tax Gimmicks then and now–sunsetting tax cuts; temporary tax hikes

by Linda Beale

When the Republicans wanted to enact huge tax cuts for individuals and businesses in 2001 and 2003 (as well asadditional cuts in other years), they realized that it would result in long-term deficits of unforgiving amounts. So they scaled back their package with a gimmick–a sunsetting tax provision that, like Cinderella’s fairy godmother, caused everything to go back to its former (natural) state on the stroke of midnight–midnight 2010, that is. Thus, they were able to claim that their package of cuts was much less costly than it would be if their plan to make the cuts permanent before 2010 rolled around materialized. It was smoke and mirrors–“we’ll do this and claim our cuts are cheap; once the cuts are enacted, we can accuse anyone opposed to making them permanent of raising taxes and no one will remember it was our gimmick to cover the real cost of the cuts. ”

The gimmick succeeded in many ways.

  • First, Barack Obama felt his chances of election were threatened enough by the status quo devotion to the current rates that he promised, in an election that was his to lose, that he would not raise taxes on anyone making less than $250,000 a year. That was nuts, for several reasons. For one, the economic crisis: By the time of the election, we were in the midst of a calamitous crisis brought on by the reckless Reaganomics of deregulation, privatization, militarization and tax cuts, with programs already underway of huge outlays from the federal treasury to compensate for the credit crisis and expectations on every side of a need for a gigantic stimulus package to re-start the economy. For two, the problem of appearing to engage in class warfare. While I think the wealthy should be targeted for much higher taxation after years of preferential treatment for their income, it would have been simpler just to argue for letting the Bush tax cuts die their natural death and then instituting in finely targeted tax cuts that would be much more beneficial to economic growth, along with finely targeted tax increases to do the same (such as elimination of the capital gains preference). Didn’t happen.
  • Second, once rates are in place, the right-wing propaganda machine starts churning and repeating a twisted version of reality. Americans aren’t very well trained in economics or finance, and we are too easily swayed by people that come across as genuine–we still buy snake oil from the traveling salesmen. So Beck and Hannity and their ilk have been pedaling the snake oil that letting the Bush cuts lapse is a tax increase, that government is evil and all taxes are theft, that it’s the Democrats who’ve caved to the Wall STreet millionaires (rather than the Bush regime, with its talk of its constituents being the “haves and the have-mores”). So people are primed to think they are overtaxed and get nothing for it.

As a result, there’s a good chance that most of the tax cuts–including the low capital gains rates and treating dividends as capital gains and all the tax breaks for multinationals– will be made permanent, or at least extended from year to year.

Will it work the same for the reverse application of the gimmick? Bill Richardson, governor of New Mexico, is trying to find a way to balance the state’s budget. States are suffering especially now during the crisis, as tax receipts are down at a time when folks are struggling with foreclosures and loss of jobs and need more in social services, not less. Richardson, who will propose a new executive budget to the Legislature on Jan. 19, plans to ask for a temporary $200 million tax increase as part of the means of meeting a $300 million budget gap for fiscal year 2011. The governor isn’t proposing specific tax hikes, but leaving it up to negotiations with the Legislature. Regretably, he has said that he is opposed to increasing capital gains taxes or personal income taxes or decreasing business tax credits and incentives, so he hasn’t left room for much other than the “sin” taxes that tend to be exceedingly regressived or other types of excise taxes (gas production has been mentioned).

Governor’s should remember that what they do now has long term effects. Naming something temporary doesn’t mean it will actually be temporary. States might do well to think about their long-term needs, and whether a change to the way they tax capital gains or a more progressive personal income tax or an addition of a VAT tax might be the best way to increase revenues for now and for the future.

crossposted at ataxingmatter