School Finance: Good Men, Bad Wizards
By Emanuel Anthony Martínez, Columnist
Posted on May 5, 2004
We already know that a tax added to any service or good creates an artificial market shift in demand. Depending on the elasticity of that demand, consumers will either pay the added cost for the good or service; or they will find a substitute for the good or service -- in some cases, a substitute that may completely replace the original good or service.
This same basic principle, one that considers human behavior as economic, is the same principle that led President Bush to promote "marriage tax" relief in 2001. Before the Kirkwood Community Center in St. Louis, Missouri, Bush said:
. . . I'm going to ask Congress to provide relief from the marriage tax. Our tax code ought to encourage family, ought to recognize marriage as a sacred institution.
That's right. He said our tax code ought to "encourage" certain behaviors, like marriage. Conversely, our tax code ought to "discourage" other behaviors -- for instance, cigarette smoking, alcohol consumption, and exotic dancing.
A government pursuing either strategy assumes that the demand for the taxed good or service is price sensitive to the change in the tax code. [If the demand is inelastic, such as the demand for water, then a tax on the item must be placed without an expectation that it will affect behavior.]
The reasoning for taxation continues that as the costs of these behaviors become more or less cost prohibitive, the frequency of these behaviors respectively will reduce or increase.
That in mind, the revenue stream from these taxed activities are often tied to programs and services related to the original activity. For instance, alcohol sales taxes might be tied to DWI programs and motor vehicle sales taxes might fund roads.
It makes sense. Fewer drinkers, fewer DWI offenses, less money for DWI programs. Same with roads. More cars sold, more cars on the road, more wear-and-tear, more money for road maintenance.
What does not make sense is when government taxes a good or service with an elastic demand in order to fund unrelated, essential government functions.
Such is the case with the current proposal by the House Select Committee on Public Finance to fund Texas public schools. The tax bill was passed by the committee on Saturday, by a vote of 21-7, and the House of Representatives will begin debating the bill on Tuesday.
The school finance plan contains a two-tiered approach: (1) funding schools through a new payroll tax that would charge employers 1.25 percent of employees' wages or $500 annually for each worker; and (2) increasing the sales tax for a range of goods and services.
Among those items listed, are the "sin tax" items. Increases in the tax rate are proposed for goods such as cigarettes, cigars, mixed drinks -- and, should video lottery gambling become legal, a tax is proposed for that too.
Supporters of this portion of the plan argue that if people are going to do "bad" things, it might as well go to a good cause. Well, sure. That's a very nice thought, but this plan promotes those "bad" things people aren't supposed to do. In fact, it makes the future of Texas dependent on the fact that people do them.
That's not a very nice thought, now, is it?
It is hard for me to think that the Texas House would be so cynical to believe that the demand for these "sin" goods is inelastic -- that people would purchase cigarettes and alcohol no matter what the price. But this portion of the plan does more than expect for demand to remain constant; it expects the demand to increase to meet our future demand for quality education in Texas.
Our legislators, indeed, would be wise to promote smoking and drinking, should this plan become law; lest our public education system not have enough resources to function.
Other "non-sin" goods and services up for a tax increase have a demand equally sensitive to price as "sin" items. As the price goes up, we can expect less people to use them. What are these items?
Newspapers. Internet access service. Magazine subscriptions.
While these items are arguably more related to education than smoking and drinking (at least they should be), these are goods and services which we are desperately attempting to promote.
El Paso already has a dismal newspaper readership. In our daily paper, I have read article after article citing our need to read, for at least the past year -- well, ever since the University of Wisconsin-Whitewater published a study that pegged El Paso as the most illiterate city in the nation.
As far as internet access goes, bridging the "digital divide" has been a hot button issue ever since the US Department of Commerce began addressing it in the last half of the 1990s. Out of one side of its mouth, Texas leadership has argued for getting more Texans connected -- especially in rural, Hispanic and Black communities -- and, out of the other end, it's saying, "OK, let's jack up the price, boys."
More could be said about how this school finance plan may affect consumer behavior should it become law -- but in the end, it ignores the larger issue. The fact that a sales tax plan for public school funding should have never been considered in the first place.
You see, all sales taxes are regressive.
What does that mean? It means that low-income Texans pay a larger portion of their income, when they pay a sales tax, than wealthier Texans.
It dumbfounds me every time something I learned in high school economics becomes cutting-edge theory in the "real world." Someone tried to argue that wealthier Texans, in fact, pay more in sales taxes because they purchased more items. Well, that's a good try, but if you turn to that high school economics textbook, you'll find a contrary view.
The sales tax is not regressive because low-income Texans pay more in absolute dollars; it is regressive because it taxes a larger portion of their income.
For example, Internet access service charged at a rate of $40 per month and taxed at a rate of 6.75 percent will cost an individual $16.88 in state taxes. A Texan earning $2,000 monthly would pay less than .8 percent of her income on the tax, while a Texas earning $500 monthly would pay 3.38 percent of his income on the tax.
Under this school finance plan, the lower the income of the taxpayer, the higher his or her rate of taxation -- no matter what the good or service purchased, no matter how many times purchased.
For a plan that is supposed to replace the "Robin Hood" plan -- a school finance plan that attempted to create equity in school finance -- this plan appears headed in the wrong direction.
It punishes the poor. It promotes "bad" behavior. It is wrong for Texas and our children.
Interestingly, there is one behavior that is more connected to education than smoking, drinking, reading, and gambling all put together -- and that behavior is making money.
More educated -- hopefully smarter -- Texans have higher incomes. And for many of these Texans, their income is a direct benefit of their public school education. Given the current situation in the House, where "political wisdom" is an oxymoron, I'm hard pressed to understand why this connection is not clearer.
Much like funding DWI programs with alcohol sales taxes, why not fund education with the income that our education creates? The better educated we are, the more money we make. The more money we make, the more money that goes into education. The more money in education, the better educated we are . . .. and so forth.
State Income tax. Three simple, feared words.
It is a brave choice -- necessary and economic.
However, before such a choice is made there must be leadership, not good men and very bad wizards hiding behind a curtain, churning out smoke, fire, and promises that never come.
* * *
- Texas House of Representatives: School Finance [website]
- Proposed Revenue under CSHB1 & CSHJR1 -- 4.30.04 [pdf]
- Texas Senator Eliot Shapleigh: School Finance powerpoint [ppt presentation]
* * *
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