September 2008

Prioritize Spending, Don’t Increase Taxes

by Amy K. Frantz

When the state of Pennsylvania experienced devastating flooding, the General Assembly met in special session and passed the Emergency Liquor Sales Tax Act, a temporary tax to help provide assistance to the flood victims.  The Emergency Liquor Sales Tax Act imposed a 10 percent tax on the sale of wine and liquor, “which is computed on the actual price paid by the consumer including mark-up, handling charge, and federal tax.”[1]  You might think this seems reasonable – passing a temporary tax on a product that is not a necessity to help flood victims.

However, this temporary tax was actually passed by the Pennsylvania General Assembly on June 9, 1936 in response to the flood earlier that year.[2]  Flood clean up and repairs were completed “within about five years.”[3]  Yet this “temporary” tax is still being collected by the Pennsylvania Department of Revenue today.  In fact, the temporary tax on wine and liquor has been increased twice, to 15 percent in 1963 and 18 percent in 1968.[4]  Because there is no longer any clean up from the 1936 flood to fund, the revenue now goes to the state’s General Fund, and “provides the state with approximately $240 million in annual revenue.”[5]

Earlier this year, many communities in Iowa experienced destructive flooding and tornadoes, leaving homeowners and business-owners with overwhelming clean up costs.  Governor Culver and Iowa Legislative leaders have discussed the possibility of holding a special Legislative session, if needed, to act upon the recommendations of the Rebuild Iowa Advisory Commission and provide disaster relief not covered by the federal government.[6]  If this special session comes to pass, or when the Legislature meets again in January, Legislators should resist the urge to adopt tax increases to fund flood relief.  Rather, if funding above the amount in the state’s rainy day fund is necessary, Iowa’s elected officials should prioritize their spending, and shift revenue from projects or programs that are less important than flood recovery.

State Senator Rob Hogg (D-Cedar Rapids) has suggested taking the $70 million the state has allocated for the construction of a new office building to replace the Henry A. Wallace State Office Building near the State Capitol and instead using it for flood recovery and relief. “The Legislature and Governor can send a bold, bipartisan message by stopping this project and redirecting the resources to immediately help communities that have been damaged by disastrous flooding and tornadoes,” said Hogg.[7]  Iowa Legislators and the Governor should follow the example of Senator Hogg, and reprioritize Iowa’s spending needs in the wake of state disasters, rather than just add more spending to cover emergency needs.

From time to time governments will adopt a new tax or tax increase for some special purpose. Unfortunately more often than not a “temporary” tax turns into a permanent new revenue source.  In 1898 the U.S. Congress implemented a luxury tax on long-distance telephone service to fund the Spanish-American War, with it’s rallying cry of “Remember the Maine!” following the sinking of the U.S.S. Maine in Havana Harbor.  While the Spanish-American War ended with a peace treaty signed in December 1898, the long-distance telephone tax was finally ended when then-U.S. Treasury Secretary John Snow announced that the Internal Revenue Service (IRS) would no longer collect this tax as of July 2006.  Taxpayers received a refund of the tax collected on long-distance service from March 2003 through July 2006.[8]  However, the revenue from the long-distance telephone tax raised prior to 2003 was kept by the federal Treasury and spent by the federal government.

While Iowans no doubt support lending a helping hand to the victims of natural disasters in our state, we should encourage our elected officials to reprioritize existing funds for disaster clean up rather than increasing taxes, even on a temporary basis. History has shown that “temporary” taxes often become permanent additions to the tax code.

Amy K. Frantz is Senior Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] “Consumption Taxes: Liquor Tax,” Pennsylvania Department of Revenue, <http://www.revenue.state.pa.us/revenue/cwp/view.asp?A=11&Q=48849> (August 20, 2008).

[2] Ibid.

[3] Clare Ansberry, “Increased Taxes in Pennsylvania Ignite Another Whiskey Rebellion,” The Wall Street Journal, August 15, 2008, p. A11.

[4] Pennsylvania Department of Revenue.

[5] “Freeman proposal would provide funding to municipalities with high levels of tax-exempt property,” State Rep. Bob Freeman News Release, November 13, 2007, <http://www.pahouse.com/PR/136111307.asp> (August 20, 2008).

[6] Becky Ogann, “Gov. Culver Doesn’t Rule Out Special Session,” KCRG-TV News, August 19, 2008, <http://www.kcrg.com/news/local/27134144.html > (August 19, 2008).

[7] James Q. Lynch, “Hogg calls for using $70 million for new building on recovery instead,” The Cedar Rapids Gazette, August 6, 2008, <http://www.gazetteonline.com/apps/pbcs.dll/article?AID=/20080806/NEWS/494883771

/1006/news > (August 20, 2008).

[8] “Treasury Announces End to Long-Distance Telephone Excise Tax,” U.S. Department of the Treasury Press Release, May 25, 2006, <www.treas.gov/press/releases/js4287.htm> (August 20, 2008).