The Real Snake Oil Salesmen

By: Sen. Howard Stephenson

Since 1995, the Utah Legislature has worked to fully implement the sound tax policy of not collecting sales taxes on business inputs like manufacturing equipment, mining equipment, computer servers, etc. The logic of this policy is two-fold. First, Utah applies sales tax to the final consumption of a good. If Utah also applies a sales tax to the equipment that goes into that good, the sales tax on the final consumption includes a tax on a tax – double taxation.

Second, we want Utah to be a place where people invest their fortunes. If we tax the equipment and materials that go into producing goods, we inevitably get less production in Utah. For the roads and schools necessary to our great state we need taxes. But we shouldn’t use tax policy to chase away the proverbial goose that lays the golden egg (i.e, people willing to invest their fortunes and their lives in Utah).

As a state senator, I have consistently led the charge to exempt ever more business inputs from sales tax. (Because Utah uses static scoring for tax-related bills, the fiscal note associated with one of these bills has always prevented us from exempting all business inputs from sales taxes in one fell swoop.) Inevitably, the spending lobby opposes these reasonable efforts. They have deluded themselves into believing that business and individuals ignore taxes when deciding where to invest.

The latest example of this foolish analysis comes in a new report comparing Utah’s tax policy to “snake oil” (Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity). Published by Good Jobs First and the Iowa Policy Project, the snake oil report purports to analyze how well the policies the American Legislative Exchange Council uses to rank states for economic competitiveness actually work. However, it degenerates into little more than a diatribe against business and sound tax policy.

The most prominent example of this diatribe is the report’s willingness to denigrate Utah’s policy of exempting “business inputs”-the scare quotes are in the original-from sales tax. On this point, the report’s analysis is quite odd, because the rest of the report relies on sundry statistical techniques. On this point, though, the mere assertion that exempting business inputs from sales tax “proves” their assertion.

As noted above, the logic of exempting business inputs from sales tax is simple. If you want less of something, tax it. We want people to invest their fortunes in Utah, so we don’t tax business inputs. It’s pretty simple, clear.

And it’s worked out pretty darn well. In just the past 5 years, Adobe, eBay and Twitter have all invested in Utah rather than their home state of California. Our insistence on low taxes and fiscal responsibility means we haven’t had to close state parks, and highways get built under budget and ahead of schedule. Plus, as the “snake oil” authors admit, people seem to like what they see in Utah: otherwise they’ wouldn’t be moving here in droves.

The snake oil report offers also furnishes (albeit unintentionally) an opportunity to show why Utah’s adherence to low taxes is good policy. The snake oil authors claim that the Laffer curve is more theoretical than real. As you may recall, the Laffer curve shows that within some range, higher taxes generate less revenue for the state.

The “snake oil” authors write, “a tax equal to 100 percent of the price of, say, cigarettes, is quite feasible, and would generate a great deal of revenue. Those addicted to cigarettes would still buy them, even if the tax effectively doubles the price.” They continue, “the overall loss in sales [from a higher cigarette tax] is nowhere near enough to offset the gain in tax revenues from the purchases that are still made” (pages 20 and 21).

As it turns out, that’s just not true. The State Tax Commission’s latest revenue reports show that while most of Utah’s revenue categories are coming in above projections, the cigarette, beer and tobacco tax category is 17.6% below projections. Importantly, cigarette taxes represent by far the largest portion of this category, and cigarette taxes are the only element in that category that has increased recently. Thus, the lower than expected revenues reflect the recent $1/pack increase in the cigarette tax.

In reality, this example is actually more compelling than the data suggest. When legislative staff assembled the fiscal note for the cigarette tax bill, they actually dipped a toe into the dynamic scoring pool. They assumed that the state would lose some cigarette tax revenue because some smokers would stop smoking, or would buy their cigarettes out of state. In other words, the current projections are low to begin with, and we’re not even meeting them.

There are a host of other problems with the “snake oil” report, including their reliance on per capita rather than total income. However, the easier evaluation of their report is merely to ask whether you want to invest your fortune in states like Utah, Virginia, South Dakota that score well on the ALEC’s “Rich States, Poor States” rankings, or in states like New Jersey, New York and Illinois that consistently fare poorly.

Sen. Howard Stephenson is a senator in the Utah Senate and is president of the Utah Taxpayers Association.

In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure…

+ Cronyism In Depth