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July 17, 2006
Oysters and Gumballs
by David Brunori
Politics of State Taxation
State Tax Notes, July 17, 2006.

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Last week the North Carolina General Assembly passed an $18.9 billion budget that's chock full of tax changes. The budget contains a measure that would refund 50 percent of all sales tax paid by stock car racing teams on purchases of in-car instrumentation and paint. The only hitch is the purchases must be made in North Carolina. My Commerce Clause antennae went up, but North Carolina can't be expected to refund sales tax paid to South Carolina. In any event, it's all OK because they love their stock car racing in North Carolina.
The budget also contains tax breaks for alternative fuel manufacturers (who are just doing their part to reduce dependence on foreign oil) as well as for oyster shell recycling. I had no idea what the heck oyster shell recycling entails. Would it be a lot like chicken bone recycling?

It turns out that baby oysters need oyster shells to grow and become grown-up oysters. People who care about oysters (beyond eating them while drinking beer on the beach) are looking to protect the oyster population by putting the shells of dead -- and eaten -- oysters back in the water. I'm not sure why you need a tax credit to keep the oyster population going. But the folks in North Carolina love their oysters as much as they love stock car racing.

Under the new budget, you will also get a break on your electricity taxes if you build an Internet data center worth $250 million. Just between us, I'm not going to spend my $250 million to build an Internet data center in North Carolina.

But the most notable tax provision in the budget is the cut in the sales tax. Starting December 1, the sales tax will be reduced 0.25 percentage point (in most counties, the new rate will be 6.75 percent). First let me say that a broad-based sales tax cut is preferable to granting exemptions or to the ever-popular bad choice -- a sales tax holiday. And the General Assembly should be praised for making a principled tax cut.

But a 0.25 percentage point cut doesn't seem very significant. On a $100 purchase a North Carolina consumer will save 25 cents. I called a lawyer who follows tax developments in Raleigh, N.C., and asked him what he had to say about the sales tax cut. Without missing a beat, he responded, "Thanks for the gumball."

Alas, More Sales Tax Holidays

This August will see several more state sales tax holidays. I think we're up to 13 now for this year. Alabama's holiday, targeted toward back-to-school shoppers, is the first weekend of August. Virginia and Tennessee also adopted holidays for August.

If you haven't heard me say this before, sales tax holidays are nothing more than political gimmicks that provide little relief to consumers. They're the epitome of cheap, cynical tax policy. I won't bore you with a recitation of how holidays violate all the concepts of sound tax policy. No one seems to care. Suffice it to say that politicians get to crow about how they're helping the poor working families of their state. The retailers get a little windfall as everyone shifts their shopping to that period. The states lose a little money ($3.3 million in Alabama), which makes it all palatable. The citizens are duped into thinking they're getting a big break. Everybody wins, or thinks they win.

We Must Subsidize Private Golf Courses

Tax increment financing (TIF) is a popular method of using tax revenue to spur economic development. TIF works in a variety of ways, but generally, increased tax revenue in an area is reinvested to improve the area's infrastructure and amenities.

Louisiana legislators overwhelmingly passed a bill that would create a TIF district that includes a privately owned golf course and the surrounding land. Any growth in sales tax collection would be given to the golf course -- the same golf course that received $12 million in state subsidies when it opened in 2004, and the same golf course that Louisiana promised it would reimburse for missed rounds through 2009. Essentially, if a golfer makes a reservation and doesn't show up, the state picks up the cost.

I wonder if the Legislature considered those tidbits when passing the bill. Louisiana is last among the states in personal income per capita and 42nd in education spending.

Taking the Pledge

California Gov. Arnold Schwarzenegger (R) pledged last week that if reelected, he won't raise taxes. It isn't clear if the governor actually signed a pledge or swore on a stack of holy books. His opponent, State Treasurer Phil Angelides (D), has called for higher taxes to reduce the deficit and expand services. If Angelides asked my advice, I would tell him to stop talking about raising taxes.

The Upshot in New Jersey

The New Jersey budget debacle has ended and, gloriously, the casinos have reopened. The state will have higher sales taxes and more property tax relief. There was lots of intrigue and gamesmanship. There was even an attempt to make the casino employees "essential state workers" so the gambling houses could stay open. It's all fun and games until a cocktail waitress is declared not only a government employee but one on par with state troopers and paramedics.

But the real issue is what's up with the Democratic Party in New Jersey. Gov. Jon Corzine is a Democrat. Assembly Speaker Joseph Roberts and Senate President Richard J. Codey are Democrats. They control the state, but managed to shut down the government? Is party discipline dead in New Jersey?

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