Does Alabama need to raise taxes?
Published 10:54 pm Wednesday, May 13, 2015
Does our state government need more tax revenue? Many politicians say yes, either from tax increases or expanded and taxed gambling. Before we decide about revenue, we should consider the bias in favor of spending over taxes in the political process identified by public choice economists.
The fallacy of the unseen is one part of the spending bias. The benefits of spending are highly visible – we see the schools and state parks, know police officers on patrol, and drive on public roads. Yet taxes leave Alabamians with less money to spend on things like home or car repairs or vacations, effects that are far less visible. People generally favor the seen over the unseen.
The news media amplify this problem. Stories can feature a state park or mental health facility threatened with closure or interview state police officers facing layoffs. Words and images reinforce the visible impacts of government spending cuts.
The effects of tax increases – businesses that never get started, employees who never get hired, or vacations which never occur – do not lend themselves so easily to news stories. And even if we recognize, for example, that the proposed sales tax increase on cars will reduce sales, identifying the Alabamians who do not buy a new car because of the tax is nearly impossible. The lack of visuals or identifiable victims makes reporting on the unseen quite challenging.
The separation of taxation and spending in the legislature also contributes to spending bias. Taxes rates are set, the Alabama Department of Revenue collects the funds, and then the legislature spends the available revenue. Budget debates highlight the benefits of spending, divorced from the cost of taxes. The legislative process plays up the value of each budget item without challenge. Every $1 million our state government spends undoubtedly generates benefits, yet the relevant question which rarely gets asked is whether the benefits exceed the tax cost.
A third element of spending bias arises from the costs of political action. In the world according to high school civics classes, democracy magically translates citizens’ views into policy choices. In reality people must act to inform state legislators about their views. Every form of democratic action, from calling or emailing legislators to voting in an election or contributing to a campaign, is costly. The person with more at stake on an issue is more likely to call, write or otherwise participate than the person with little at stake. Generally the benefits of government spending (e.g. for state employees or contractors) are more concentrated than the costs, which are spread widely by taxes.
This foundation of special interest politics is really just simple economics.
Our elected representatives consequently receive a very biased view of the benefits of spending. Political scientist James Payne found that 96% of the witnesses at Congressional hearings about spending programs spoke in favor of the programs. Alabama legislators received visits this session from representatives of K-12 and higher education, the arts, small businesses, and credit unions, among others. Lawmakers rarely hear from Alabamians like the woman who said to Governor Bentley in April, “Last year our health insurance more than doubled, crippling our family budget. … You want to raise money, but I don’t have any more to give.”
Repeated exposure to the visible benefits of spending likely affects how politicians view the tradeoff between spending and taxes. Politicians are particularly likely to overlook the unseen cost of taxes, and so their assessment that they need more of our money to spend should be taken with a grain of salt.
None of what I have said proves that Alabama should not raise taxes. The hundreds of millions of dollars of spending at stake definitely benefits Alabama. But the unseen costs of tax increases, too easily ignored by politicians and news stories, must be fully recognized so that Alabamians can decide whether state taxes should rise.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at firstname.lastname@example.org and like the Johnson Center on Facebook.