Until now, the tax system imposed on gambling mostly made sense: If you won money, you paid taxes on your net winnings—the money you made after subtracting the amount spent on losing bets. But, under the new rule, gamblers will no longer be able to deduct the full value of their losses, capping such deductions at 90% of reported winnings. This creates a tax on phantom income—forcing gamblers to pay federal income taxes on up to 10% of their winnings even if they end up losing all of it and more by year’s end.   

The change is projected to raise between $125 million and $165 million in additional tax revenue annually, or around $1.2 billion over the next decade, according to a report by the Joint Committee on Taxation. But this projection ignores gamblers’ long history of sidestepping punitive gambling laws on land, sea, and via the internet. If gamblers were to hide even just 10% more of their winnings—a likely outcome—it would completely negate the additional revenue generated by the new rule. Combined with the adverse effect the new tax would have on corporate and payroll taxes from industry contraction, the cap could result in a net tax revenue loss.  

Underreporting of gambling winnings is already a known and longstanding problem. From 2018 through 2020, just under 150,000 Americans failed to file tax returns on approximately $13.2 billion in gambling winnings, according to a report from the Inspector General for Tax Administration. The new rule will likely only make such underreporting more widespread. 

Some gamblers aware of the change might begin to avoid the types of large-prize games that trigger IRS paperwork, like winning $1,200 or more at a slot machine or $5,000 at a poker tournament. Vacation gamblers may similarly shift from Las Vegas to Macau, or to European and Caribbean casino destinations, where their winnings are not automatically reported to the U.S. government. Many gamblers will also likely turn to offshore gaming websites, which also do not report gambling winnings to the IRS, some of which now accept bets in even harder-to-track cryptocurrencies.   

But the damage extends far beyond an uptick in underreported gambling winnings. Mid- and high-stakes poker tournaments could face collapse as players weigh hefty buy-in fees and other costs against diminished returns. Fewer entrants mean smaller prize pools and likely fewer events for professionals. Poker coach Phil Galfond warned the rule would essentially end professional gambling in the U.S. Alex Cane, CEO of the betting exchange Sporttrade, echoed the sentiment, declaring that no gambler “serious about betting is going to bet anymore, or at least not going to report that they do.” Casino owner Derek Stevens similarly worried about the impact on Vegas casino-resorts, arguing that the new rule would force many bettors to move offshore.  

The stakes are also existential for states invested in the gaming industry, like Nevada, where gambling taxes fund around 35% of the state’s budget and where the industry supports around 27% of the state’s workforce. Nationwide, the $330 billion gaming industry directly employs around 700,000 people and supports a total of 1.8 million jobs, according to industry data. All of that could be threatened as gamblers inevitably seek out alternatives to avoid the new tax.  

These concerns prompted Nevada Rep. Dina Titus (D-Clark County) to introduce the Fair Accounting for Income Realized from Betting Earnings Taxation (FAIR BET) Act days after the passage of the new rule. Her bill would restore the 100% deduction for gambling losses, eliminating the phantom tax. The legislation represents more than fairness for gamblers—it is protection for the nearly 2 million American jobs and state budgets relying on a healthy U.S. gaming industry. 

The phantom tax provision in the new rule appears solely aimed at raising federal revenue from a politically vulnerable group. Though most Americans gamble occasionally, few will defend the activity against tax hikes. But this short-sighted policy risks repeating past mistakes.  

When taxes make legal gambling punitive, players simply move underground. Unregulated bookies thrived when sports betting was banned in the U.S. Offshore websites boomed after the crackdown on online poker. The new rule guarantees that history will repeat itself—shrinking the legal industry, fueling illicit activity, and ultimately costing jobs and revenue.  

The post How the One Big Beautiful Bill Act taxes gamblers on money they didn’t keep appeared first on Reason Foundation.

Nevada Question 5 is a legislatively referred statutory change that would exempt child and adult diapers from the sales tax. The state Sales and Use Tax Act of 1955 specifies what products are exempt from sales taxation. Current exemptions include farm machinery, food, prosthetic devices, newspapers, feminine products, medical equipment, medicines, oxygen delivery equipment, and mobility-enhancing equipment. Question 5 would add child and adult diapers to this list of exempt items. 

Fiscal Impact 

Legislative staff estimated that exempting child and adult diapers from the sales tax would reduce state general fund revenues by $5.8 million in fiscal year 2025 alone and by $460.9 million between January 2025 and December 2050. 

Proponents’ Arguments 

Kelly Maxwell, executive director of Baby’s Bounty, testified in favor of the measure that became Question 5. She argued that “diapers and related healthcare items are not a luxury. They are fundamental needs for the health and development of a child.” She continued:

“Babies are at risk for many health conditions and illnesses, including skin infections, rashes, urinary tract infections and viral meningitis. Newborns require eight to ten diapers a day. Families may spend over $1,200 per year on diapering supplies…Without an adequate supply of diapers, parents are unable to send their children to daycare, preventing their own attendance at work or school. Fifty-seven percent of parents missed an average of four days of school or work in the past month due to a lack of diapers. We need to ensure that essential items, including diapers, are not so costly that our families must forgo their jobs or education.” 

In a state senate hearing, Maxwell estimated the proposal could save a family with children in diapers about $100 per year. 

Opponents’ Arguments 

During legislative hearings, no one testified in opposition to the proposal that is now Question 5. 

Discussion 

The argument in favor of exempting certain items from sales taxation is typically that certain items, like medical devices or medicines, are necessary for life, and so taxation should not make them less affordable. But because sales tax exemptions don’t come with reductions in government spending and revenue needs, they actually don’t make the poor better off. Instead, the tax burden shifts to other goods purchased by the poor. 

States tend to compensate for sales tax exemptions or holidays by increasing the tax rate on items that remain subject to taxation. A 2022 analysis of sales tax exemptions for groceries by the Tax Foundation found that the lowest-earning 10% of households experienced 9% more overall sales tax liability in areas with a grocery tax exemption because they paid more tax on other items. 

The Tax Foundation argues narrow sales tax exemptions on items like groceries also wind up being surprisingly regressive. While it’s true that low-income households spend a higher share of their income on diapers than high-income households, low-income households also spend a higher share of income on household goods in general. By contrast, high-income households tend to save and invest larger income shares. The result is that lower-income households wind up paying a larger share of their income in sales taxes and, to the extent sales tax exemptions drive tax rates higher on other items, these exemptions make sales taxes even more regressive. 

In its recommendations for structuring sales taxes, the Tax Foundation declares: “An ideal sales tax is imposed on all final consumption, both goods and services.”  

The post Nevada Question 5 would allow a sales tax exemption for diapers appeared first on Reason Foundation.

The Colorado Legislature placed Colorado Proposition KK on the ballot for voters to decide. If approved, it places a 6.5 % excise tax on gun manufacturers, gun dealers, and ammunition vendors that make over $2,000 monthly on the net taxable retail sales of guns, gun precursor parts, and ammunition. The first $30 million of revenue per fiscal year from the tax would go to the Colorado Crime Victims Services Fund, the next $5 million to the Behavioral and Mental Health Cash Fund for veterans’ mental health services, the next $3 million to the same fund for behavioral crisis response services for children and youth, and the last $1 million to the School Disbursement Cash Fund. Revenues beyond that would be spent as the legislature chooses.  

This excise tax is in addition to an existing 2.9% state ​​sales tax and 11% ​​​​federal excise taxes on guns. Exceptions were made for sales to law enforcement and active-duty members of the armed forces. In addition, gun manufacturers, dealers, and ammunition vendors would be required to register with the Department of Revenue. If approved, Colorado would become the second state in the nation to have an excise tax on guns and ammunition after California levied an 11% tax intended to fund violence intervention and education.   

Fiscal Impact  

The state ​​estimated that this excise tax would bring in $35.6 million in revenue in 2025-2026 and $36.9 million in 2026-2027. This estimate assumes that the legal purchase of guns will not change in response to the additional taxes. The administrative cost, to be paid for with tax proceeds, is $390,000 to administer the tax in 2024-2025.  

Proponents’ Arguments  

Organizational supporters of a “yes” vote argue that victims’ programs need funding and that this is a fair way to provide it. Colorado Coalition Against Sexual Assault and its member programs stated that without the funding made available through the excise tax, victims of sexual assault and other crimes will see a decrease in resources. Democratic Majority Leader Monica Duran (Jefferson) and Democratic Representative Meg Froelich (Arapahoe) sponsored the legislation, and Duran cited her own usage of victim support services as a single mom as essential to her escaping domestic violence. Supporters argue that the steady funding stream that would come from this excise tax is necessary to ensure the adequate provision of services, such as crime victims’ services and access to mental health services for veterans and children, that they say remediates the harmful collateral consequences of guns and gun-related products, including suicide and intimate partner killings. They argue the excise tax is consistent with both the longstanding federal tax on retail firearms sales, which is used to fund wildlife conservation, and is consistent with historical examples from the 19^th and early 20^th century of state taxes on firearms serving as a regulation on sales and purchases.  

Opponents’ Arguments 

Organizations that have encouraged a “no” on the ballot measure argue it is a limitation on gun rights and a tax that hits lower-income individuals hardest. The National Rifle Association has called it an attack on Second Amendment rights and those who assert those rights. The Congressional Sportsmen’s Foundation also sees the bill as a restriction of the Second Amendment. They argue that the tax is a form of a “sin tax” (such as that levied on alcohol and tobacco) via higher prices passed on by dealers and manufacturers to consumers, meant to deter law-abiding sportspeople from purchasing guns and ammunition necessary to their pursuits, and meant to reduce legal gun ownership across Colorado. Without the purchase of guns by sportspeople, The Sportsmen’s Foundation further warns that conservation funding, dependent on federal excise taxes on guns, would be lowered. The Independence Institute’s argument points out the tax will hit the poor the hardest: “The legislature is making clear that Black and Brown people, since they are statistically poorer, shouldn’t own firearms, or at least should face a substantially higher hurdle to exercise this right.” Senator Kevin Van Winkle (R-Highlands Ranch) likened the excise tax to a poll tax due to its being levied on a commodity whose possession is protected by the Constitution.  

Discussion  

The purpose of the excise tax in Prop. KK is framed by its sponsors as providing stable funding for programs that seek to help victims of crime, those who have experienced violence-related trauma, and those in need of mental health services. The state is feeling pressure for such funding due to a massive drop in federal funding for these purposes through the Victims of Crime Act (VOCA) from the Crime Victims Fund, which is replenished from fines tied to federal crimes, penalties, and forfeitures. Because VOCA is the primary source of funding for victims’ services in all 50 states, the projected $700 million decrease in 2024 has sparked widespread concern, with Colorado expecting a 45% cut. A large coalition—including state attorneys general, politicians, and service providers across the country—has been calling for various solutions to plug the budget holes and ensure stable funding.  

Crime victim and mental health services are important, but is an excise tax on a targeted industry the right way to fund them?  

​​The United States ​Supreme Court stated in Sonzinsky v. U.S.​ (1937)​, a decision upholding Congress’ ​constitutional ​power to tax firearms dealers, that “a tax may have regulatory effects and may burden, restrict, or suppress the thing being taxed.” ​The federal government has had an 11% excise tax on the production and importation of guns​ to support conservation, wildlife preservation, and hunter-education programs. However, the fact that taxing firearms has passed constitutional muster doesn’t make it a good policy decision. ​Excise taxes violate several principles of sound tax policy. 

First, it is not neutral. Taxes shouldn’t distort markets, impinge on individual choice, and punish businesses and individuals monetarily by creating categories of “sinful” legal products for the purpose of reducing their usage. Such taxes are i​​nherently regressive, hitting the poor much harder than the middle class or wealthy. This is particularly problematic for guns, the only commodity whose use is enshrined in the Constitution as a right, and the individual ownership of which was upheld in the Supreme Court decision District of Columbia v. Heller.  

The measure further violates sound tax policy by being an inherently unstable source of funds for services it claims desperately need funding. This is because it depends on the assumption of unchanging consumer behavior when, in fact, sin taxes do tend to reduce the use of the taxed product, and thus, the revenue from them declines over time. Hence, sin taxes are a terrible way to fund important programs. Although proponents of the bill did not state that the tax is intended to reduce gun sales, recent analysis of the U.S. firearms market suggests that it would have that effect. One study concluded that for every 1% increase in the price of guns, demand falls by 2.5%, and so a 6.5% increase in costs to manufacturers and dealers, when passed along to consumers, could have a sizable effect on sales.  

If Coloradans agree that crime victims’ services, access to mental health and behavioral services, and school safety are important, these should not be dependent on fluctuating excise taxes. They should especially not be dependent on excise taxes that rely on the continued robust market in weapons asserted to cause the damage requiring interventions to begin with. These programs for victims and those in need of mental health should be supported through general funds, both at the federal and state levels.  

There are also problems with targeting the gun industry with this tax. The measure states that the tax is imposed “in order to generate sustained revenue for programs designed to remediate the devastating impact of these products on families and communities across the state.” This statement has two glaring problems. One is that it is unclear what percentage of the services provided directly relate to the impact of gun violence. Victims’ services are provided to all victims, regardless of the use of a gun in the commission of the crime. Behavioral and mental health counseling to those who have experienced combat trauma also does not relate to domestically purchased guns. The bill mentions the mental health crisis for children following COVID-19. COVID-19 was a virus, not a gun, and an abundance of other factors, like loneliness, created the conditions under which suicidal ideation increased.   

Another concern is that the bill makes legal guns and ammo the “sin” to be taxed, sidestepping the fact that the vast majority of legal gun and ammo buyers will pay the tax and never use or allow those products to hurt anyone. It’s a sin tax that overwhelmingly punishes the innocent for a sin they don’t commit.   

These taxes are the wrong approach to funding social services deemed essential, ​​​will unfairly affect the poor more than others, will not provide stable funding for victim services, and will impinge on law-abiding citizens exercising their rights to buy guns and ammunition. ​​     ​ 

The post Colorado Proposition KK would levy tax on firearms dealers, manufacturers, and ammunition vendors appeared first on Reason Foundation.

All Georgia residents who own residential or commercial property pay property taxes. Georgia Amendment 1 would allow counties to reduce the amount of property taxes that a homeowner pays on their primary residence. The amendment is limited to jurisdictions that don’t already have a homestead exemption in place. The exemption would be effective if personal property taxes increase faster than inflation. Counties, consolidated governments, municipalities, or local school systems will be allowed in early 2025 to opt out of allowing the exemption for their residents. 

Fiscal Impact 

The amendment allows the state to create an exemption. Allowing the General Assembly to create an amendment does not have any fiscal impact. If the exemption is created, the size, structure, and number of local governments that opt out will determine the fiscal impact.  

Proponents’ Arguments 

Proponents argue that Georgia residents need relief from rising property taxes. Some counties have seen property taxes increase by 50% over five years, which means that, even with a steady tax rate, those residents are paying 50% more in taxes.  

State Representative Beth Camp (R-Lamar), one of the bill’s cosponsors, stated:

“This bill should help homeowners by allowing incremental, measured increases (or decreases) in property values rather than the sweeping dramatic ones seen over the past few years. It also provides uniformity in application—everyone in the area impacted has the same CPI applied to their homes.”  

Opponents’ Arguments 

There were no arguments against the bill. While 11 Democratic senators voted against the bill, none of them provided public reasoning for their decision. One of the bill’s sponsors was a Democrat.  

Discussion 

Homestead tax exemptions are widespread across the United States and Georgia. Georgia counties have regularly approved homestead tax exemptions even when it is clear that other taxes will increase as a result.  

While tax cuts are almost always a good thing, since this amendment would only apply to homeowners and not to other property owners, including commercial properties and rental properties (and therefore renters), it’s not the most effective or fair way to cut taxes. A statewide cut in property taxes would be fairer. Additionally, an across-the-board cut would not suffer the same economic distortions that arise from only cutting taxes for one targeted group of residents.  

Further, the property tax cuts may not lead to increased revenue over time. While property tax revenues are projected to rise in some Georgia counties, even with millage rate rollbacks, others are losing population, and it is unlikely that the property tax exemption by itself would change this trend. 

However, arguments that the Georgia amendment would reduce local government revenues are not true. The Homestead Property Tax Exemption only adjusts the homestead exemption for inflation, so it reduces the rate of increase in revenue for local governments but does not reduce their revenues.  

Third, Georgia already offers multiple state homestead exemptions: 

• The Standard Homestead Exemption, which provides a $2,000 deduction from the assessed value of the primary residence for county and school taxes;  

• Individuals aged 65 and older may claim a $4,000 exemption from all county ad valorem taxes if their income is below $10,000 per year;  

• Individuals aged 62 and older may claim an additional exemption for taxes with educational purposes (including to retire school bond debt), if the individual’s income is below $10,000;  

• Individuals aged 62 and older may claim the Floating Inflation-Proof Exemption allowing for an exemption based on increases in the home’s value if the home has increased in appraised value by $10,000 or more and;  

• Disabled veterans or their surviving spouses are eligible for exemptions as well as surviving spouses of U.S. service members or peace officers/firefighters killed in the line of duty. 

Thirty-six of the 159 Georgia counties, including the five most populated, offer countywide homestead exemptions. 

The post Georgia Amendment 1 would create a local homestead property tax exemption appeared first on Reason Foundation.

Colorado Proposition JJ, the Retain Sports Betting Tax Revenue for Water Projects Measure, seeks to eliminate a current cap of $29 million on the amount of sports betting tax revenue the state allocates for water conservation and management projects. This allows the state to retain and allocate all sports betting tax revenue for water protection initiatives.  

Currently, all sports betting tax revenue in Colorado is directed toward a Water Plan Implementation Fund. However, due to Colorado’s 1992 Taxpayer’s Bill of Rights (TABOR), tax revenue from the activity exceeding $29 million must be refunded to sports betting businesses. If voters approve the November measure, the cap would be eliminated, and the state may retain all additional sports betting tax revenue for its water management program.  

In 2023, Colorado voters approved a similar ballot measure by a wide margin. The measure lifted the cap on tobacco and nicotine sales taxes that the state could retain to fund a universal preschool program.  

Fiscal Impact  

Under Colorado’s current law, 10% of the revenue generated by sports betting goes first to the Department of Revenue’s Division of Gaming to cover administrative costs. Of the remainder, 6% is transferred to a “hold harmless fund,” which is then distributed to casinos in the state to compensate them for revenue reductions stemming from sports betting legalization. All of the remaining revenue is transferred to Colorado’s Water Plan Implementation Cash Fund, where it may then be distributed for water conservation and management projects.  

Since the legal sports betting market opened in May 2020, its total tax revenue has steadily increased, rising from $11.7 million in 2021—its first full year of operation—to over $27 million in 2023. As this revenue is expected to continue increasing as the sports betting market matures, the state is rapidly approaching the $29 million cap set by TABOR. According to forecasts by the state’s Legislative Council Staff, this will likely occur in the current fiscal year (FY), with non-governmental experts estimating that sports betting tax revenue will reach $35 million in FY 2024-2025.  

So the bottom line is that money currently collected as tax revenue but refunded to those sports betting operations would now be retained and spent by the state.  

According to the Legislative Council Staff analysis, this would increase the retained revenue for water projects by up to $2.8 million in FY 2024-2025, by $5.2 million in FY 2025-2026, and by up to $7.2 million in FY 2026-2027. Similarly, the measure could increase state expenditures on water projects by the same amounts in subsequent years, with expenditures on water projects increased to $2.8 million in FY 2025-2026, $5.2 million in FY 2026-2027, and $7.2 million in FY 2027-2028. However, while the measure will increase expenditures, it is not expected to increase costs to the state since the tax revenues are already collected under the current law.  

Proponents’ Arguments 

Groups supporting the measure include those who organized in favor of the original sports betting legalization bill. This includes environmental nonprofits, groups representing agriculture industry members, tourism businesses, and other business interests in the state. Surprisingly, it includes the Colorado Gaming Association, which represents casino interests that would otherwise receive refunds for sports betting tax revenue in excess of the current $29 million cap. According to the group’s executive director, Peggi O’Keefe, gambling businesses in the state always intended to pay the 10% tax on sports betting, and the fact that tax revenue exceeded expectations doesn’t change that.   

The main arguments in favor of the ballot measure center on the fact that the initial $29 million cap instituted in 2019 was calculated based on limited data because Colorado was one of the first states to legalize sports betting.  

They also assert that allowing the state to retain all sports betting tax revenue for water management would provide ongoing funding for critical efforts to address mounting pressure on the state’s water supply, particularly along the Colorado River. With its headwaters in Colorado’s Rocky Mountain National Park, Colorado’s mountain snowpack supplies an estimated two-thirds of the Colorado River water flow. 

Moreover, supporters point to the likely increased pressure on the state’s water supplies due to the rising population, which is expected to jump by nearly 30% by 2050. According to state water experts, increasing demand from residential and agricultural water use may outstrip supply by 2050, leading to a water shortage of up to 240 billion gallons annually.  

Opponents’ Arguments 

Significant opposition to the ballot measure has yet to emerge. However, some individuals have expressed opposition, arguing against tying revenue to “sin taxes,” such as those imposed on gambling activities. Tony Jones, who writes a twice-monthly “Everything in Moderation” column for The Summit Daily News, recently asserted that tying critical funding to “sin taxes” causes governments to rely on funding that such taxes are meant to reduce. If successful at reducing the supposed “sin,” the state could find itself reliant on unstable funding sources. Given the critical nature of water management in Colorado, Jones argues that it is inappropriate for its funding to be tied to unreliable revenue sources that may leave these critical projects underfunded should revenue from sports betting decline. Moreover, he argues that tying funding for water projects to unrelated business taxes lets taxpayers “off the hook” for funding programs they benefit from.  

Discussion 

Arguments for the state to retain all sports betting tax revenue for the funding of water conservation are likely to be compelling for voters. There is particular interest in addressing the dwindling water flow along the Colorado River, which has its headwaters in Colorado’s Rocky Mountain National Park. Colorado’s mountain snowpack supplies an estimated two-thirds of the river’s water flow, which services not only Colorado cities such as Denver but also other cities all the way to Los Angeles. Due to a historic 22-year drought, river water flows have declined dramatically, with its two main reservoirs—Lakes Powell and Mead—nearly drained in 2022. 

Additionally, experts estimate that Colorado’s population is likely to jump nearly 30% by 2050. According to state water experts, the increased demand from a growing residential population, as well as agricultural activities, may lead to demand outstripping supply by 2050 and a shortage of up to 240 billion gallons annually thereafter.  

Addressing water shortages and contamination could impose significant costs on Colorado residents. For instance, the American Water Works Association recently estimated that mitigating PFAS contamination in the state’s drinking water could cost up to $2000 per household. PFAS, or “forever chemicals,” stem from the industrial production of waterproof, nonstick, and stain-resistant products.  

The measure might facilitate improving state sports betting regulations, particularly concerning tribal gaming interests. Though tribal casinos in Colorado have been authorized to offer in-person sports betting, their multi-year attempt to gain the state’s permission to enter the online sports betting market has been unsuccessful so far. Though tribes inarguably have a right to participate in this market alongside their non-tribal counterparts, lawmakers have resisted striking an agreement that would allow their entry due to concerns that the tribe’s tax-exempt status would reduce the sports betting tax revenue available for water projects.  

Tribes are sovereign nations and not subject to state taxes, and such exemptions are generally seen as supporting tribal independence and economic welfare. Penalizing tribes for their tax-exempt status by denying entry into the online sports betting market is not only inappropriate but also likely a violation of tribal sovereignty. Yet, this has not stopped Colorado from erecting barriers to tribal entry into the online sports betting market.  

Currently, Colorado has just two tribal casinos. Compared to the nearly $4 billion economic impact of the state’s 33 commercial casinos, Colorado’s two tribal casinos had an estimated economic impact of $250 million in 2022. While tribes’ tax-exempt status may attract some gamblers out of the taxable commercial sports betting market, it is highly unlikely that this will result in net reductions in overall revenue collected and funds available for the state’s water projects. If voters approve the November ballot measure, allowing the state to retain all of the sports betting tax revenue collected from non-tribal casinos in the state, it may mitigate concerns about tribal entry into the online sports betting market as any reduction in taxable sports betting revenue from tribal competition would be more than offset by net increases in the tax revenue Colorado can retain from commercial sports betting.   

Importantly, Colorado could accomplish its goals of increased water project funding without raising taxes. Colorado voters implemented TABOR to prevent unlimited tax revenue and to compel the state to prioritize its spending. Creating exceptions by targeting a specific group of companies or industries for higher taxes is neither fair nor sustainable tax policy, and it undermines the goals of TABOR. Reallocating existing funds could offer a more stable funding source for water projects without compromising taxpayer protections or targeting a particular industry. 

The post Colorado Proposition JJ seeks to retain sports betting tax revenue for water projects appeared first on Reason Foundation.

Georgia Amendment 2 would transition the role of the Georgia Tax Tribunal, which is housed in the executive branch, to the Georgia Tax Court, which would be housed in the judicial branch. The Georgia Tax Court would have statewide jurisdiction. If approved, judges would be appointed by the governor, with approval from the House Committee on Judiciary and Senate Judiciary Committee, and serve four-year terms. 

Fiscal Impact 

Since the amendment moves jurisdiction and funding from the executive branch to the judicial branch, it is not forecast to affect revenue or costs.  

Proponents’ Arguments 

Several arguments favor this amendment. First, the Tax Court would provide more sunshine and uniformity to its decisions. Second, as noted by the firm Evans Sutherland, the Tax Court would have broader jurisdiction over constitutional claims and Department of Revenue actions, answering appeals that would otherwise go to the Supreme Court and allowing the Supreme Court to focus on more serious crimes.  

Opponents’ Arguments 

There were no arguments against the bill. Only one legislator, a Republican, voted against the bill, and he did not disclose his reasoning. There was no public opposition to the amendment.  

Discussion 

Tax tribunals and tax courts are widespread across the United States. Twenty-nine states have tax tribunals housed in the executive branch, and six states have tax courts housed in the judicial branch.  

Tax tribunals are more widespread, but tax courts are in states across the political spectrum from Hawaii to Indiana. Georgia’s current Tax Tribunal is designed to hear appeals of an official assessment, denials of a tax refund claim, challenges to state tax execution, declarative judgments, and denials of petition. The new tax court would continue to hear each of these claims in addition to constitutional claims and Department of Revenue actions.  

First, a new tax court seems a better fit for the judicial branch. Under the current system, the courts are accountable to the same branch of government that creates the rules they adjudicate, which seems like a clear conflict of interest.  

Second, if a case in a tax court needs to go to trial, it now has a dedicated pathway. Before, it would have to wait behind cases involving conventional crimes, sometimes for years.  

Third, judicial branch entities are required to release their rulings publicly, while executive branch agencies are not. So, this amendment would provide more public information on complicated cases and more guidance for defendants and lawyers.  

However, picking judges would be up to elected politicians, which could politicize the process. For example, executive branch employees currently oversee tax cases. While bureaucrats may not be known for their speed, they tend to be less political than politically appointed individuals.  

The post Georgia Amendment 2 would create the Georgia Tax Court appeared first on Reason Foundation.

Georgia Referendum A would increase the personal property tax exemption from $7,500 to $20,000, meaning that people would not have to pay county personal property taxes on property valued up to that amount. In Georgia, the most common types of personal property are business inventory, farm machinery, and motor vehicles. Motor vehicles, trailers, or mobile homes would not receive the exemption.  

Fiscal Impact 

Since the state does not collect personal property taxes, there is no impact on state revenue.  

However, county and city revenue would be affected. Reason Foundation estimates, based on the 123 counties that could increase the exemption for personal property taxes, that the revenue loss could be as high as $250 million annually. However, some counties may choose to hike the millage rate as well, offsetting some of the revenue loss.  

Proponents’ Arguments 

One argument is the amendment would provide a needed tax break to small businesses in Georgia. State Rep. Mike Cheokas (R-Americus) sponsored the constitutional amendment “to help reduce the burden of high taxes and prohibitive regulations that adversely affect businesses in Georgia.” The Georgia Chamber argues that the bill will contribute to the continued success of the state’s pro-business environment by lowering taxes for businesses and will encourage more businesses to relocate to Georgia, providing additional jobs and more net revenue in the long term.  

Opponents’ Arguments 

The Associated County Commissioners of Georgia and the Georgia Municipal Association opposed the bill creating this amendment on their websites, but neither provided any public rationale. The Atlanta Journal-Constitution argued that the amendment, if passed, could reduce funding for education and other purposes. Forty-two House Democrats voted against the original $50,000 exemption, and 13 were either excused or did not vote. However, none publicly expressed their rationale. The bill passed unanimously in the Senate.  

Discussion 

This measure would provide important tax relief to property owners. It counters the increasing tax burden on property due to rising property values and inflation. Further, it provides needed tax relief to lower-income residents.  

The legislation comes at a time of high inflation and government expenditures. Georgia’s personal property exemption level is not indexed to inflation. The House bill increased the exemption to $50,000, but to secure enough votes for passage in the Senate, it was lowered to $20,000.  

Georgia’s property taxes are administered at the county level and used for general budget expenditures such as education and public safety. While more populous and growing counties have the resources to overcome the revenue loss from this tax cut, many rural counties declining in population might not.  

This amendment would create some distortions because it treats similar types of property differently. For example, some types of transportation vehicles such as motor vehicles, trailers, and motor homes are not granted the exception whereas airplanes and boats receive the exemption.  

The post Georgia Referendum A would raise personal property tax exemption appeared first on Reason Foundation.

For the past year, the American Road and Transportation Builders Association’s (ARTBA) magazine has featured articles about projects funded by IIJA grants. However, at the annual ARTBA public-private partnership (P3) conference in July, senior staffers from both the House and Senate appropriations committees expressed doubt that the higher funding baseline would happen, surprising many attendees.

Contrary to the views of many transportation colleagues, I was cheered by this prediction, and here is why. The main reason is that the U.S. government is facing a monumental fiscal crisis a decade from now. The Social Security Administration’s trustees expect the system’s trust fund to be exhausted in 2035. This means Social Security could pay benefits based only on annual Federal Insurance Contributions Act (FICA) revenues, which would require a benefit cut of up to 20%.

The following year, the Medicare Part A trust fund is likewise forecast to run out of money. Annual outlays from these two programs total $2.1 trillion, so if Congress has to make up 20% of their annual outlays, that would be $420 billion in new federal spending.

With the national debt already exceeding 100% of gross domestic product (GDP) and projected by the Congressional Budget Office (CBO) to continue rising, Congress should focus on reducing federal spending, not increasing it even more by additional borrowing, thereby further increasing the national debt.

All three major credit rating agencies—S&P, Fitch, and Moody’s—have downgraded the federal government’s credit rating, and they may issue further downgrades if huge annual federal budget deficits continue to add trillions more to the national debt each year.

Just to ensure we’re all on the same page, remember that in recent years, general fund bailouts of the federal Highway Trust Fund (HTF) have totaled $275 billion—all of it borrowed, adding to the national debt.

The Infrastructure Investment and Jobs Act signed in 2021 was funded entirely by borrowing $550 billion, of which $209 billion is allocated to highway and transit grants. When the next president and Congress take office in Jan. 2025, they should cease bailing out the Highway Trust Fund and reject calls to enact a second Infrastructure Investment and Jobs Act.

But what about America’s aging, obsolete bridges, our aging Interstate Highway System that needs reconstruction and modernization, and other infrastructure improvements?

Almost all vital infrastructure is owned and managed by state and local governments. For facilities such as airports and highways, owners can issue long-term revenue bonds to finance new capacity expansion projects and reconstruction efforts. They also have increasing opportunities to utilize long-term public-private partnerships using a mix of private equity investment and long-term debt financing (for either revenue-risk or availability-payment financing).

The difference between federal borrowing (for HTF general-fund bailouts and programs such as IIJA) and state borrowing is that states have constitutional requirements to operate with balanced budgets. State and local government borrowing must be backed by a facility’s revenue stream or the state or locality’s tax base. Of course, this constraint on the extent of their borrowing is significant, but it provides some incentive to select projects that make economic sense.

The kind of shift I’m talking about is a way to safeguard much-needed infrastructure investment against the genuine threat of federal government insolvency. Based on CBO projections, the country has about 10 years to get this transition underway prior to Social Security and Medicare reaching insolvency. When their trust funds are exhausted, Congress’s top priority will likely be to prevent benefit cuts to the programs’ combined $2 trillion annual spending.

Nearly all other long-standing federal programs could face significant spending cuts at that point. Some spending cuts will likely be enacted in haste as lawmakers are forced to confront the entitlements emergency.

Infrastructure organizations, including state departments of transportation and metro area transit agencies, need to start thinking about, planning for, and implementing self-help measures to reduce and perhaps eliminate their dependence on federal funding. Those state governments that have established rainy day funds would do well to expand them over the next decade as part of their preparation to take over more responsibility to pay for their needed infrastructure.

This is not a brand-new idea. One policy discussed, largely in-house, by the Reagan administration in the 1980s was devolving many federal functions to state and local governments.

A decade later, the idea of devolving many functions to state and local government caught on, stimulated by Brookings Institution scholar Alice Rivlin’s 1992 book, “Reviving the American Dream.” Organizations such as the Eno Foundation held conferences on devolution. David Luberoff of the Harvard Kennedy School argued that federal transportation programs should be devolved to the states. 

After speaking at several such conferences, I wrote a 1996 Reason Foundation policy study, “Defederalizing Transportation Funding.” That effort got as far as a highway funding devolution bill from then-Sen. Connie Mack (R-FL) and then-Rep. John Kasich (R-OH). Over two years, the bill would have phased out all but two cents of the federal gasoline tax, with the remaining two cents for roadways on federal lands and Indian reservations, plus some Federal Highway Administration oversight. The bill also had strong support in California, including from then-Gov. Pete Wilson and the state’s 1996 Commission on Transportation Investment. Even the head of the American Association of State Highway and Transportation Officials in 1995 supported a significant shift from federal to state funding.

Thus, this idea has a history and was able to obtain significant support from key transportation players when there was reason to question the status quo, which at that time was often talked about as “donor vs. donee” states.

Today, the national debt and the impact the looming insolvency of entitlement programs will have on federal transportation spending are good reasons to question the transportation funding status quo.

A version of this column first appeared in Public Works Financing.

The post Preparing states, cities and the transportation sector for federal insolvency appeared first on Reason Foundation.

The most recent parts of the story began on Aug. 1, when Fitch Ratings downgraded the federal government’s bond rating from AAA to AA+. For a company, that might not be a big deal, but for the government of the world’s largest economy, the downgrade was a shot across the bow. This was the second time a rating agency took such an action with the federal government’s bond rating, with S&P doing so in 2011.

Headlines in the financial press, such as The Wall Street Journal’s “America’s Fiscal Time Bomb Ticks Louder” and “U.S. Downgrade Flashes Warning Sign.” indicate how seriously the downgrade should be taken. As the Journal’s Greg Ip wrote:

One reason for Fitch’s downgrade was the absence of any political will to deal with the main drivers of the deficit: spending programs for older Americans, including Social Security and Medicare, and repeated cuts to tax rates for most households.

Fitch noted how much worse U.S. fiscal metrics are than its peer countries. To give one example: The U.S. is on track to spend 10% of federal revenue on interest by 2025, compared with just 1% for the average triple-A rated country and 4.8% for double-A-rated. Why, then, isn’t the U.S. rating even lower? Because the reserve status of the dollar and the size and safety of Treasury debt gives the U.S. unprecedented borrowing ability.

Indeed, it was hard to get presidents or Congress to worry about the deficit when interest rates were low. Today, a bond market signaling that the world is no longer safe for deficits may be the first step to tackling them.

The long-term consequences of the growing debt were estimated in the latest Congressional Budget Office’s (CBO) 2023 Long-Term Budget Outlook. Its baseline 30-year projection, which assumes no changes in existing laws and programs, is that by 2053, the national debt will constitute 181% of the U.S. Gross Domestic Product—compared with 98% today. And paying interest on that debt will increase from taking 15% of federal revenue today to 35% of federal revenue in 2053 (more than any federal budget item except Social Security and Medicare). And that’s just CBO’s baseline estimate.

The Committee for a Responsible Federal Budget estimates that, given likely extensions of tax cuts and expansions of federal programs, the 2053 national debt will likely rise to 222% of GDP.

Where does transportation fit in the discussion about the national debt?

Well, in July, the House Appropriations Committee, in response to conservative members saying they’re concerned about out-of-control federal borrowing while a Democrat is in the White House—as opposed to largely supporting massive deficit spending during the Trump administration—proposed trimming Fiscal Year 2024 Department of Transportation (DOT) discretionary grant spending by $5 billion.

This relatively minor cut would affect only a few programs in six modal agency discretionary grant programs totaling $22.5 billion last year. Yet a headline in Eno Transportation Weekly read, “FY24 House Funding Bill Has Massive Cuts to DOT Grant Programs.”

This proposal raised similar cries of alarm from highway, transit, and rail organizations, such as the headline “Transportation Funding Under Threat in House of Representatives” by United for Infrastructure, which advocates for more infrastructure investment.

Let’s think ahead a few years to when massive federal funding in the Infrastructure Investment and Jobs Act, often referred to as the bipartisan infrastructure law, and the Inflation Reduction Act’s funding has been expended. At that point, state transportation budgets would be expected to revert to their pre-stimulus spending levels.

But what can we expect transportation organizations and state DOTs to call for?

Based on history, it’s almost certain states will propose the most recent year of those expanded funding levels as their new budget baselines and ask Congress for federal funding. And if Congress goes along with the calls for that level of infrastructure spending, there will be another massive amount of federal borrowing. Since CBO’s dire debt forecasts don’t include this level of increased federal transportation spending, this type of increase would make all CBO’s 30-year projections serious underestimates.

Many years ago, a chairman of the Council of Economic Advisers, Herb Stein, propounded what became known as Stein’s Law. “If something cannot go on forever, it will stop.” But the longer that rude awakening takes to happen, the worse the consequences will be.

America’s transportation leaders should think hard about lobbying for this unsustainable spending to continue. The largest contribution to the out-of-control national debt is the impending bankruptcy of Medicare and Social Security. If, or when, Congress finally gets around to grappling with the costs of those programs, it’s likely that most or all federal discretionary programs, including infrastructure programs, will be in for serious, long-term spending cuts. Transportation leaders should start planning for that major change now.

One ray of hope for the highway and bridge sector is the opportunity that comes with the urgent need to phase out per-gallon fuel taxes and replace them with per-mile road user charges, also called mileage-based user fees. If done right, that transition could fully restore the users-pay/users-benefit principles on which the gas tax was based a hundred years ago. It could even mean converting state highway systems into revenue-financed highway utilities analogous to electric, gas, and water utilities. Public utilities, which can be government-owned or investor-owned, charge customers based on how much of the service they use. They also issue long-term revenue bonds backed by the projected income from their user charges to fund the costs of maintaining and improving the infrastructure.

Some advocates of road user charges envision them as externality taxes, including charges for carbon dioxide (CO2) emissions and noise, plus transit subsidies. This version of a road user charge conflates a user fee with an externality tax. A user fee is intended to keep pace with the capital and operating cost of the infrastructure in question, increasing over time as needed. Externality taxes are designed to reduce and eliminate the externalities, so their eventual revenue would be zero. 

What about mass transit subsidies? Long-time traffic and revenue consultant Ed Regan has suggested that metro areas could add a transit tax to charges in the road user charge (RUC) future. This would mean only residents of an urban area would pay for its transit subsidies—not rural taxpayers or federal taxpayers in general. This isn’t ideal, but it would be more equitable than today’s system of diverting nationwide highway user tax revenue to transit in a few hundred metro areas.

In the near term, as advocates of more spending point out, thousands of bridges still need refurbishment or replacement across the country. But there is no way that federal taxpayers, via expanded federal spending, can address that total problem without massive tax increases. Innovative states are using long-term public-private partnerships to address hundreds of smaller bridges, as Pennsylvania’s Rapid Bridges program is doing. A growing number of major bridge replacements, including the Gordie Howe Bridge in Michigan, the I-5 bridge between Oregon and Washington, and the completed Ohio River Bridges project, are also moving ahead as toll-funded public-private partnerships.

P3 developers have a growing U.S. track record, and infrastructure investment funds and U.S. public pension funds are eagerly seeking American public-private partnership highway and bridge projects to invest in.

While both major political parties have irresponsibly run up the national debt and rarely taken it seriously, it is increasingly clear that the bills will eventually come due, and endlessly expanded federal borrowing and spending is not a realistic long-term future for the transportation sector.

State and local transportation officials should start planning for a self-help transportation future that requires users to pay for the infrastructure they use and utilizes public-private partnerships to fund and operate significant projects.

A version of this column first appeared in Public Works Financing.

The post The growing national debt and the future of federal transportation spending appeared first on Reason Foundation.

Summary

Under current state law, family farms are exempt from paying certain property taxes on a wide range of farm equipment such as tractors, combines, balers, sprayers, and more and farm products such as livestock and crops.  Georgia’s 2022 farm tax exemption measure would expand those tax exemptions to dairy products and eggs. The measure would also allow larger farms that are created by merging two or more family farms to qualify for tax exemptions.  Equipment must be used for farm production and be owned or held under a lease-purchase agreement to qualify for the tax exemptions, and it does not apply to automobiles and trucks.

Fiscal Impact

Georgia’s poultry industry generates $1.3 billion in tax revenue annually.  Information for dairy products and eggs, unfortunately, was not available.  According to a representative of the Georgia Milk Producers, the industry’s impact, economically, on the state is estimated at $1.03 billion for the 2021 calendar year, some portion of which is tax revenue. Complete analysis of how this measure would impact Georgia taxpayers was not available.

Proponents’ Arguments

Georgia Gov. Brian Kemp supports the measure. He stated, “There’s no more generational business than a family farm…I know how important small business is to Georgia’s economy, and that’s what Georgia Farm Bureau and the Georgia Agribusiness Council are fighting for in the Capitol every day.” 

The agriculture industry also supports the measure because it would provide their businesses with a considerable tax break.

Opponents‘ Arguments

While there is no active organized campaign against this measure, some members of the legislature expressed concerns about giving a selected group a special tax break that other groups do not get.

Discussion

This tax measure is an initiative promoted by Georgia Gov. Brian Kemp and is consistent with his efforts to provide tax relief and other favorable policies for the state’s agricultural sector. Support for the agricultural industry, however, extends far beyond just the governor.  Because most of the state’s lawmakers, especially in the Republican Party, also represent constituencies in the rural parts of the state, tax breaks for the agricultural and timber industry have been politically popular.

This measure is very similar to one passed in 2000 that gave a tax exemption for certain farm equipment of family-owned farms for tools and trade implements of manual laborers.  In 2006, voters also approved a measure expanding the homestead exemptions and property tax exemptions for agricultural products.

However, a key principle of good tax policy is that taxes should not pick winners. Broad-based tax cuts are always better than narrowly targeted ones that only benefit a select, politically-connected, or popular group. This measure is not a broad-based tax cut. At best, it would expand an existing tax break the agricultural industry already gets to apply more broadly across that industry.

Tax breaks for selected industries are not without consequences.  They are not necessarily accompanied by state or local government spending cuts to offset any lost revenue, so the tax burden often shifts to taxpayers or industries that are not as favored by politicians.

The post Georgia ballot measure to expand tax exemptions for family-owned farms (2022) appeared first on Reason Foundation.

The Georgia Timber Equipment Exempt from Property Taxes Measure on the November 2022 ballot would change the state’s tax law so that starting Jan. 1, 2023, all timber equipment such as feller bunchers, forwarders, harvesters, chainsaws, skidders, saws, stump grinders, log loaders, and bandsaws would be exempt from ad valorem taxes.  However, this exemption would not include timber itself. 

Fiscal Impact

Data shows the timber industry paid nearly $20 million in ad valorem taxes to the state in 2020. However, the state does not show what percentage of that revenue is derived from timber equipment so it is unknown how this would impact state and local government tax revenues.

Proponents’ Arguments

Georgia Gov. Brian Kemp supports the measure, and has argued the measure will “help us treat the forestry industry the same way that we do agriculture as well as protect hunting, fishing, and conservation land, and more.”

The timber industry also supports the measure. Tobey McDowell of C. McDowell Logging claimed, “It takes 8-10 pieces of equipment, including the trucks and trailers, for us to run just one logging crew, and the overall costs for that equipment is increasing every day. So, when you consider the tax bill on our equipment, it determines whether we purchase new equipment, keep running old equipment, or just give up all together. So, right now any break we can get will help.”

Opponents’ Arguments

There is no organized campaign against this measure. State Sen. Lindsey Tippins (R-Cobb County) voted against the measure when it was before the state legislature and told us in a phone interview that he opposes it based upon the potential unfairness of the timber industry being exempt from ad valorem taxes while other industries, such as the construction industry, and many others, still have to pay those taxes.

Discussion

This tax measure is another initiative in Georgia Gov. Brian Kemp’s consistent efforts to provide tax relief for the state’s agricultural sector.  Most of Georiga’s state lawmakers, especially in the Republican Party, also represent constituencies in the rural parts of the state where tax breaks for the agricultural and timber industries have been politically popular. This measure is very similar to one passed in 2000 that gave tax exemption for certain farm equipment of family-owned farms for tools and trade implements of manual laborers.  In 2006, voters approved an additional measure expanding the homestead exemptions and property tax exemptions for agricultural products.

However, a key principle of good tax policy is that taxes should not pick winners. Broad-based tax cuts are always better than narrowly targeted ones that only benefit a select, politically-connected, or popular group. This measure is not a broad-based tax cut. At best, it would expand an existing tax break the agricultural industry already gets to apply more broadly across that industry.

Tax breaks for selected industries are not without consequences.  They are not necessarily accompanied by state or local government spending cuts to offset any lost revenue, so the tax burden often shifts to taxpayers or industries that are not as favored by politicians.

The post Georgia measure to make timber equipment exempt from property taxes (2022) appeared first on Reason Foundation.

Summary

This property tax amendment would change the Georgia constitution to allow local governments to grant temporary property tax changes for properties damaged by disaster events and located within disaster areas. Some details of the tax relief mechanism and rules governing local government use of this power will likely need to be legislated.

State Rep. Lynn Smith (R) sponsored the constitutional amendment after an EF-4 tornado—the Enhanced Fujita Scale ranks tornados from zero to five, with five being the most devastating—hit Coweta County in the southwestern exurbs of Atlanta in March 2021. The Federal Emergency Management Agency (FEMA) rejected individual disaster assistance, however. In July 2021, the Atlanta Journal-Constitution reported:

In a letter this week to Gov. Brian Kemp, the Federal Emergency Management Agency wrote “the impact to the individuals and households from this event was not of the severity and magnitude to warrant the designation of the Individual Assistance program.” Such assistance includes financial aid and services for people with uninsured expenses…In May, President Joe Biden declared a disaster in Georgia, making federal funding available for state and local government recovery efforts in Coweta and other counties. But many residents with uninsured property losses are still struggling in the wake of the storm, Newnan Mayor Keith Brady said.

…FEMA issued a prepared statement Friday, saying Kemp appealed its “original denial of Individual Assistance and FEMA found that its original evaluation was correct.”

“The biggest factor when determining the need for either public or individual assistance is whether the state and local jurisdictions have the resources available to meet the recovery needs,” the agency said.

In addition to the federal government’s decision not to provide federal taxpayer-funded assistance, state law prevented any type of tax breaks for property damaged by natural disasters. Therefore, Coweta County homeowners had to pay property taxes on 1,726 homes that were destroyed or damaged.

Rep. Smith said officials in the city of Newnan “wanted to be able to give some tax relief in 2021” but were not able to do so. The amendment was passed unanimously by both chambers of the Georgia State Legislature.

Fiscal Impact

The average Georgia property tax bill is $1,771 per year. If this figure is applied to all 1,726 homes devastated by the 2021 tornado to give an estimate, exempting those families from paying taxes would reduce total property tax revenue by $3.1 million annually. 

However, the amendment would not apply just to the Coweta County homes. All property in Georgia that is affected by various natural disasters could be exempted from property taxes, which would increase the fiscal impact. For example, if three percent of properties qualified for exemptions in a year, that would total $204 million per year. 

Proponents’ Arguments For

Proponents wanted federal taxpayers to aid the tornado victims. “It still breaks my heart that federal funding was denied for individuals, but HR 594 would allow local governments to step in and provide an alternative pathway to direct relief for citizens in the future, especially if the federal government in Washington fails to do so,” State Rep. Lynn Smith (R) stated.

She added that the amendment “provides this option to communities who may face the same devastation that Coweta County did last year.”

Opponents’ Arguments Against

There were no arguments against the bill. No members voted against the bill. However, 29 members of the Georgia House of Representatives and one state senator abstained. Further, there were no Democratic cosponsors, potentially indicating limited support from Democrats. 

Additional Discussion

When a property is damaged due to a natural disaster, FEMA determines whether state and local governments have the resources to provide sufficient aid. The largest factor in FEMA approving or denying aid to homeowners is if a county and/or city government have the resources to provide their own financial aid. Local officials In Coweta County and the city of Newnan wanted to waive the collection of property taxes, but state law prevented the county and city from taking those actions. As a result, Rep. Smith sponsored an amendment to allow counties to waive the collection of property taxes from those homeowners whose property is uninhabitable.

On one hand, the legislation provides important relief to homeowners. It does not require local governments to provide funding. Rather, it allows governments to waive the collection of property taxes.

If the federal government does not provide resources, state and/or local governments can provide direct financial resources, waive property taxes, both, or neither.

However, this amendment also creates three policy challenges, each relating to wealth transfers. First, many homeowners in Coweta County were underinsured or uninsured. This property tax relief bails them out. And in the future, it incentivizes homeowners to underinsure their own properties because they may expect other taxpayers to foot the bill.

Second, the tax exemption could lead to a major loss in revenue for counties. Georgia has 159 counties and thousands of cities. If fires, flooding, hail storms, tornados, and other issues can prompt property tax exemptions, it is easy to see the number of exemptions growing exponentially in the years to come. And, even if only 3% of homes had property taxes waived in a given year, the statewide loss would be more than $200 million. Counties are likely to try to offset those losses by imposing higher property taxes on other homeowners or new taxes or fees.

Finally, the tax exemption allows FEMA’s outdated, 20th-century approach to disbursing disaster aid to continue. Currently, FEMA justifies whether to provide federal aid based on the average income and wealth of a region. Yes, many of the homeowners in Coweta County lived in mobile homes and were below the average federal income, but FEMA ruled the local and state governments had the funding to assist them rather than asking federal taxpayers to do so. Going forward, FEMA could improve by determining this type of federal aid based on census block grants, a more detailed geographic unit.

The post Georgia temporary property tax change for disaster areas amendment (2022) appeared first on Reason Foundation.

Unfortunately, this policy path is reducing the value of Americans’ paychecks and savings accounts as devaluation is used to effectively default on obligations incurred over decades. While it is clear how decades of deficit spending, rising entitlement costs, off-the-books war spending, and massive stimulus packages got America into this situation, a new data project from Reason Foundation reveals the true depths of this debt crisis.

The Debtor Nation visualization traces the growth of federal spending back to 1965, when Congress passed Medicare and Medicaid, helping fuel the explosion in health care costs thereby contributing significantly to the current $30 trillion national debt. From the creation of those entitlement programs the federal government ran an annual budget deficit in 52 of the 57 years between 1965 and 2022.

But beyond the debt figure typically used, Reason Foundation’s analysis of the latest federal financial report published by the U.S. Department of the Treasury in February finds that federal liabilities, when including obligations from entitlement programs, exceed $100 trillion. Unfunded future Medicare obligations account for almost 47 percent of that total.

The official federal balance sheet excludes Social Security and Medicare obligations, even though these benefits — accrued and anticipated by American workers not employed by the federal government — have similar legal status to the retirement benefits accrued and expected by federal civilian employees and veterans. Proper accrual accounting, which is the approach used both by corporations and state governments, requires liabilities to be recognized when they are assumed. The federal government took on obligations for Social Security in 1935 and Medicare in 1965, so it is past time to recognize these liabilities when reporting the national debt.

To its credit, the U.S. Treasury provides these ‘off balance sheet’ liabilities in a separate Statement of Social Insurance. Placing these liabilities on the federal balance sheet where they belong yields a total debt burden of $103 trillion as of the end of the 2021 fiscal year, which was 446 percent of America’s gross domestic product (GDP).

Much of this debt is now coming due as a large cohort of Baby Boomers retire and become eligible for Social Security and Medicare benefits. Baby Boomers began reaching early retirement age in 2008, and the last Boomer will reach full retirement age in 2031. In the 2030s and ‘40s, the annual trillion-dollar budget deficits needed to pay for these benefits will take America’s debt and deficits to largely uncharted territory.

The Congressional Budget Office’s own projections show that just making interest payments on the 2051 federal debt will exceed all the federal government’s tax revenues by 46 percent, crowding out discretionary spending. Those projections are highly sensitive to the future path of interest rates, a factor partially controlled by the Federal Reserve as recent interest rate hikes have illustrated.

The Federal Reserve holds down federal borrowing costs by purchasing more federal debt securities, typically with newly created reserves. By competing with other buyers of U.S. Treasury securities, it can push down interest rates. The Federal Reserve typically remits most of the interest income it receives on its bonds back to the U.S. Treasury, further lowering the government’s effective borrowing costs. There’s a possibility that the Fed may need to step in more and more in the future if foreign demand for U.S. debt securities decreases.

The two biggest foreign buyers of U.S. Treasury securities are China and Japan. China’s holdings of U.S. debt have declined $1.25 trillion in 2015 to $1.07 trillion in 2021 amidst deteriorating relations. In the worst-case scenario for the U.S., Chinese bondholders may need to liquidate more while dealing with fallout from their lockdowns and the collapse in domestic home prices while Japan’s holdings could stop growing or even shrink as that country grapples with economic issues related to its own aging population’s decline.

In that case, to hold down federal borrowing costs and interest rates, the Federal Reserve would seek to buy more U.S. Treasury securities, pumping more money into the economy, risking more inflation and elevating prices. This would devalue the existing debt and hold down the debt-to-GDP ratio while causing pain for Americans relying on a nest egg of dollar-denominated assets or receiving fixed-income payments. Cost-of-living increases may protect Social Security recipients from the worst ravages of inflation, but they would further drive up federal spending and deficits and increase calls for the Fed to print more money, which would trap Americans in this inflationary loop.

The massive federal debt accumulation is going to force extremely tough political and policy choices in the coming decades, but political leaders should stop the bleeding and start to contain the damage by adopting a more prudent approach to federal spending.

The federal budget process should be overhauled so that all forms of federal spending, including entitlements, are included in the budget process. Federal budgeting should rely on the accrual basis of accounting, forcing elected officials to internalize the long-term impact of entitlement programs and spending proposals. The size of annual deficits should be strictly capped. Given the looming debt and interest payment problems, if the budget can’t be balanced in the short-term, the deficits should be capped to prevent the growth of the debt-to-GDP ratio.

Since 1965, Congress has pushed tens of trillions of debt onto future generations. The subsidization of Baby Boomers is going to cripple young people and the country if political leaders don’t start to confront these long-term fiscal issues.

A version of this column previously appeared in the Hill.

The post The true depths of the U.S. debt crisis appeared first on Reason Foundation.

In November 2016, California voters approved Proposition 64 to enact a regulated, adult-use cannabis market in the Golden State. At the time, four other states had already created adult-use cannabis markets, including Alaska, Colorado, Oregon, and Washington.

California already had a largely unregulated medical cannabis market in place, following voters’ historic passage of Proposition 215 in 1996, which was the first medical marijuana law in the nation to go into effect. Since Proposition 64 required specific regulations to govern inventory tracking, licensing, testing and more, these regulatory provisions would have to extend to the unregulated legacy medical market. If not, market participants could subvert the regulatory intent contained in Proposition 64 simply by remaining in the unregulated medical market

Realizing this need, California lawmakers passed the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) in 2017.

MAUCRSA superseded prior legislation from 2015 called the Medical Cannabis Regulation and Safety Act, which sought to create a regulatory structure for the medical market but never took effect due to the passage of Proposition 64 and MAUCRSA, which largely built on the regulatory approach that had been developed within that prior legislation, but also extended it to the newly authorized adult-use market.

The statutory language contained in Proposition 64 and MAUCRSA combine to create the legal framework for California’s commercial cannabis industry. Regulations governing the industry must be consistent with these authorizing statutes. Proposition 64 contained important provisions that strongly affect California’s commercial cannabis market that cannot be changed through regulatory action alone. Chiefly, these include imposing two new excise taxes and devolving authority to local governments to regulate or outright ban certain or all types of commercial cannabis activity within their jurisdictions.

Taxes affect both consumers’ and producers’ decisions in the legal market primarily by introducing a price disparity between legal cannabis products and comparable cannabis products offered through the illicit market. Similarly, local bans on legal sales over extended geographic areas can drive consumers without access to legal products within a reasonable distance of their homes to purchase substitute goods on the illicit market.

This analysis develops an empirical model to estimate the degree to which California’s tax regime affects participation within its commercial cannabis market, and how participation may change through different approaches to taxation.

Part 2 of the study details the various tax structures currently facing legal cannabis enterprises in California and how those tax structures have performed in yielding public revenue.

Part 3 examines the key factors that influence consumer decisions to participate in the legal or illegal market.

Part 4 reviews the existing literature on consumer price sensitivity for cannabis products and calculates a price sensitivity for consumers of legal products in California and Oregon.

Part 5 uses data calculated in prior sections to model California consumers’ expected behavior due to changes in retail price in response to a change in tax policy.

Finally, Part 6 of the report concludes with recommendations for improving the performance of California’s legal cannabis market.

Full Policy Study: The Impact of California Cannabis Taxes on Participation Within the Legal Market

The post The impact of California’s cannabis taxes on participation within the legal market appeared first on Reason Foundation.

Tardy federal budgets are nothing new in Washington. According to the Tax Policy Center, Congress has only completed the budgetary process in a timely fashion, which requires passing all 12 appropriations bills prior to October 1, four times since fiscal year (FY) 1977. The last time Congress’ budgetary process worked as expected was FY 1997, more than two decades ago.

When the budget does not pass on time, Congress must pass a continuing resolution (CR) to avoid a government shutdown. Since continuing resolutions typically maintain departmental funding at prior-year levels, they do not signal the policy choices ultimately made in the budget process. As a result, federal managers must begin the fiscal year without a clear direction as to whether they should be increasing or decreasing staff and non-employee operational expenditures. If a federal agency or department ultimately receives a significant funding increase or funding cut in the final appropriations bill, managers may have insufficient time to respond efficiently.

While federal budgeting has been broken for some time, the situation in 2022 is especially bad. Over five months into the budgetary year, the House Rules Committee produced a 2,741-page omnibus budget bill in the wee hours of March 9, just hours before the bill’s scheduled vote on the House floor.

At the last minute, lawmakers found what some considered to be a poison pill embedded in the omnibus. To fund a supplemental COVID-19 expenditure, the omnibus clawed back money provided to states in the American Rescue Plan Act of 2021. However, the claw-back was inequitable.

Under ARPA, 20 states received their full aid allocation last year, while another 30 states received half their allocation in 2021 with the rest of the money slated to arrive later this year. The rescission only affected this latter group of states by reducing their second ARPA check.

States receiving a split allocation were those that suffered an increase in their unemployment rates of less than two percentage points during the first year of the COVID-19 pandemic. That universe included some purple and conservative states, such as Florida, Georgia, Alabama, and Utah, which tended to have fewer shelter-in-place and other restrictions in the pandemic.

Given that Florida was already slated to receive the smallest amount of ARPA state and local aid on a per capita basis, singling it out for this rescission seemed unfair to many. California, by contrast, would not have faced a claw-back of the ARPA money even though it recently reported a $75 billion budget surplus.

Eventually, the COVID-19 spending was removed from the package before the omnibus was easily approved in the House and then in the Senate in a bipartisan, 68-31, vote. The ultimate omnibus bill included many earmarks as part of the backroom horse-trading that led to a bloated, “must-pass” bill that will lead to a larger national debt.

The Congressional Budget Office’s last projection of FY 2022 discretionary budget authority was $1.4 trillion. The omnibus ultimately provided a discretionary budget of $1.5 trillion. (Budgetary authority and outlays are not the same but tend to move together.) The ultimate difference, about $35 billion of additional budgetary authority, is likely to increase the deficit in FY 2022. It also sets a higher spending baseline in future years.

As a result, the omnibus bill is likely to add hundreds of billions to the deficit over CBO’s 10-year projection window. The $13.6 billion Ukraine aid package in the bill is also unfunded, and will thus be tacked onto the deficit, but at least it is not a recurring expense (for now).

In the rush to pass the continuing resolution, its long-term deficit implications have received relatively little attention. And this raises another problem with today’s budgetary process or lack thereof. Budgeting is supposed to be a process of allocating scarce resources. This scarcity is typically imposed through a clearly defined limit.

In most state governments, for example, a balanced budget requirement limits spending to the amount of revenue anticipated in any given fiscal year. Having given up on balanced budgets long ago, however, Congress has no clear spending limit. As a result, there is no procedural bulwark against what happened in the current budget cycle. Republicans wanted more defense spending, Democrats wanted more non-defense spending, and they compromised by including both without offsets. Politico noted:

Leaders in both parties have declared the legislation a win. Democrats boast of the almost 7 percent increase they secured for non-defense agencies, increasing that funding to $730 billion. Top Republicans tout the $782 billion they locked in for national defense, a 6 percent hike from current spending.

Looking ahead, it is worth noting that prospects for the FY 2023 budget process already look dim. The process is supposed to kick off with the submission of the president’s budget, required by law to be submitted by Feb. 15, which has yet to happen this year. Once congressional committees start working on the 2023 budget, members will likely be focused on their re-election campaigns, slowing any progress. Sadly, perhaps the best outcome we can expect for the coming fiscal year is a two-month continuing resolution followed by an omnibus budget bill during the lame-duck session after November’s congressional elections.

With the last major federal budget reform now 50 years behind us, and after 20 consecutive years of federal budget deficits, the congressional budget process obviously needs an overhaul. The key elements of any budget reform should be focused on a fixed and realistic timetable for budget consideration and adoption, as well as a clearly defined limit on spending.

The timing issue could be addressed by moving to a biennial budgeting process, which is used in many states, or even a quadrennial timetable coinciding with a presidential term. Enforcement mechanisms might include withholding of Congressional and staff salaries and funding for their offices and travel if the budget is not completed and signed on schedule.

Balanced budgets no longer attract much support from either major political party and no longer seem feasible in the current context of Social Security and Medicare expanding to accommodate Baby Boomer retirements. But, even if lawmakers don’t want to tackle the runaway costs of entitlement programs, federal spending can be limited without requiring that it be equal to revenue.

One alternative to the current process: Limit federal spending to a level at which it does not increase the nation’s debt-to-gross domestic product (GDP) ratio.

It is notable that the shambolic budgets of FY 2022 and FY 2023 are happening under a unified government, just as when Republicans had complete control in the first years of the Trump administration. The hope has to be that, eventually, leaders on both sides of the aisle concerned with government effectiveness can coalesce around meaningful budget reforms, including those covered here.

The post The broken federal budget process gets even worse with $1.5 trillion omnibus spending bill appeared first on Reason Foundation.

Rate hikes will drive up federal debt service costs.

In July, the Congressional Budget Office (CBO) projected that the federal government would spend $306 million on $24.4 billion of publicly held debt, implying an average interest rate of about 1.25 percent. With such a large volume of debt outstanding, the U.S.’s annual interest costs could increase rapidly if interest rates rise.

But there are a couple of caveats.

First, some federal debt is long-term and thus its interest rates are locked in. Also, now that the Fed has bought up a large fraction of outstanding Treasury securities, much of the government’s extra interest costs are returned to the Treasury when it remits its net income to the federal government each year.

Higher interest rates also pose threats to the value of investment assets. Stock prices could fall as investors switch to fixed-income securities providing better returns. But as long as real interest rates — i.e. the difference between interest rates and inflation — are negative, most investors could be expected to stick with stocks. Home price appreciation might also weaken because higher mortgage interest rates reduce housing affordability: Buyers will have to take out smaller loans to make their target monthly mortgage payment.

But the biggest fiscal risk may stem from corporate lending. Rather than issue fixed-rate bonds, many highly leveraged companies rely on the syndicated bank loan market where most borrowing takes place on a floating rate basis. According to research from Fitch Ratings, $1.6 trillion of syndicated loans are currently outstanding with almost all borrowers carrying either speculative grade credit ratings or the lowest investment grade rating (Baa3 on Moody’s scale or BBB- from S&P, Fitch and other agencies).

Syndicated loans are distributed across multiple banks with about half of the volume packaged into Collateralized Loan Obligations (CLOs). Although analogous to the subprime Residential Mortgage-Backed Securities (RMBS) that triggered the Great Recession, CLOs have generally performed well over their 30-year history.

The loans packaged into subprime RMBS and CLO deals have high default risk, but corporate borrowers have generally proven more reliable than homebuyers with low credit scores. That may change when the Fed starts raising interest rates, especially if the hikes are precipitous.

A wave of leveraged loan defaults could harm both CLO investors and banks — to the extent that they continue to hold syndicated loans on their books. Because CLOs are well diversified, it is unlikely that defaults will impact investors in the senior AAA/Aaa rated tranches.

But if a lot of leveraged corporate borrowers are forced into bankruptcy by higher interest costs, we could see waves of layoffs. Suppliers to failing companies may also face late and/or partial payments, spreading the pain around the economy.

In this way, a sharp increase in interest rates could significantly slow economic growth or even trigger a recession.

Corporate defaults played a significant role in the 2001-2002 recession, even though the blame is more commonly put on the collapse of the dot-com stock bubble and the impact of the 9/11 terror attacks. But around the time of this recession, such big names as United Airlines, Kmart, Global Crossing, WorldCom, and Enron filed Chapter 11 bankruptcy petitions.

Congress could reduce the pressure on the Fed to raise interest rates by reining in deficits. Lower deficits would mean a reduced volume of Treasury securities coming onto the market, which push up interest rates, unless purchased by the Fed with new money. Although meaningful spending cuts seem unlikely in the current Congress, it could help by not passing the Build Back Better act — something Sen. Joe Manchin (D-W.Va.) appears to have ensured.

Although BBB proponents insist that the bill is close to deficit neutral over the ten-year budget window, CBO estimates that the measure would add $792 billion to the federal debt in the first five years after passage, with that amount partially offset in the second five years. So, in the short-to-intermediate term, BBB is inflationary. It only gets close to balancing if its various spending initiatives are not renewed by future Congresses.

But irrespective of how Congress reacts, the Fed should rethink its stimulative policies and allow interest rates to rise. Although there may be significant economic pain in the near-term, this is better than allowing inflation to become chronic, necessitating much more drastic action down the road.

A version of this column previously appeared in The Hill.

The post The Federal Reserve should rethink its stimulative policies appeared first on Reason Foundation.

A 6 milligram (nicotine)/30 milliliter bottle of e-liquid, for example, would be taxed at a rate of $5.01 under the proposal. A typical pack of e-liquid pods would be taxed at $4.59. The federal tax on cigarettes is $1.01 per pack. Thus, e-cigarettes would be taxed more than regular cigarettes, and dramatically more so in states that already levy their own high e-cigarette taxes. 

Michael Pesko of Georgia State University, one of the country’s leading economists when it comes to analyzing the effect of e-cigarette taxes, estimates the new tax on nicotine alternatives would cause 2.7 million more daily adult smokers, 530,000 more teen smokers, and 29,000 more prenatal smokers.

This is because e-cigarettes are substitutes, not complements to combustible cigarettes, and millions of American ex-smokers have used these products to get off smoking traditional cigarettes. 

“I think it makes sense to raise taxes on the most lethal forms of tobacco,” Pesko told Reason Foundation. “Unfortunately, this bill doesn’t do that. Instead, it raises taxes on one of the safer forms of tobacco and so the net public health impact of the tax is likely to be negative by pushing people toward more harmful combustible tobacco use.”

The Cochrane Review, the gold standard of evidence-based medicine, recently concluded e-cigarettes are probably more effective than traditional nicotine replacement therapies in helping smokers quit. “We are moderately confident that nicotine e-cigarettes help more people to stop smoking than nicotine replacement therapy or nicotine-free e-cigarettes,” they found.

From a public health perspective, rather than encourage traditional cigarette smokers to switch to nicotine alternatives that could improve their health, if implemented, this proposed tax seems certain to contribute to a greater incidence of lung diseases going forward.

As well as having a devastating impact on public health, the tax is highly regressive and would violate President Biden’s campaign promise not to raise taxes on people earning less than $400,000 a year. According to a recent Gallup poll, Americans with an annual household income of less than $40,000 are significantly more likely to vape than higher-income groups. Americans without a college degree are twice as likely to vape as college graduates. Those groups would be paying this tax increase.

With more than 15 million adult vapers now in America, many of whom attribute their ability to quit or reduce smoking traditional cigarettes to their use of e-cigarettes, it’s baffling House Democrats would consider targeting this group with a huge tax increase that could push many of them back to smoking and worsen public health.

The proposed tax increase won’t be worth causing 2.75 million more Americans to smoke and won’t generate much of the funding required to pay for the $2 trillion proposal. As the Tax Foundation’s Ulrik Boesen points out, a similar tax proposal from 2019 was estimated to raise less than $10 billion over 10 years. “The nicotine tax proposal in the Build Back Better Act neglects sound excise tax policy design and by doing so risks harming public health. Lawmakers should reconsider this approach to nicotine taxation,” Boesen concluded.

It is very difficult to understand why this proposed nicotine tax was included in the spending plan since it will have such negative consequences for public health, hurt low- and middle-income Americans, and break one of the president’s key campaign promises.

Sen. Joe Manchin (D, WV) opposes the tax and may be enough to ensure that it never becomes law. I second what Sen. Manchin said earlier this week, “A tax on nicotine? That doesn’t make any sense to me whatsoever.”

The post House Democrats’ tax on e-cigarettes would lead to millions more smokers appeared first on Reason Foundation.

According to a Senate Finance Committee legislative summary, the new tax would have applied to individuals with at least $1 billion of assets or at least $100 million of income for three consecutive years. The number of individuals falling into these categories across the United States appears to be less than 1,000. Instead of paying capital gains when they sell their assets, under the tax, affected individuals would have to revalue their assets each year and pay the federal government a percentage of any annual increase.

Internal Revenue Service records leaked to ProPublica showed that several high-profile billionaires pay relatively little in federal taxes. They can avoid taxation while maintaining luxurious lifestyles, in part, by retaining their appreciated assets and then borrowing against them.

Setting aside the question of whether a new tax targeting asset values of the very wealthy is the best solution, estimating the revenue it would raise is non-trivial, meaning basing government spending on that revenue is fraught. It may be tempting to look at the Forbes Billionaire Lists for two consecutive years, take the difference in estimated wealth for each billionaire on these lists and multiply by the tax rate. But such a top-line approach neglects various factors that could result in deficit-fueling revenues.

First, the proposed billionaire tax, if ever implemented, could then be temporarily stayed and ultimately thrown out by the judiciary on constitutionality grounds. Article 1 Section 9, Clause 4 of the Constitution says, “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.”

In modern terminology, this means that federal taxes on individuals or their property (“direct taxes”) must be the same amount for everyone. This clause was used to defeat the original federal income tax. Only after the passage of the 16^th Amendment could the federal government impose the income tax, which it did in 1913. The text of the amendment was short and straightforward:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Because the 16^th Amendment only makes an exception for income, any other direct tax, such as one on wealth, would appear to be unconstitutional. That said, courts have not struck down things like estate and gift taxes, and some legal scholars have defended the constitutionality of wealth taxes, although their arguments remain to be tested in court.

Proponents of the new levy likely structured it as a tax on unrealized capital gains rather than total wealth to protect it from being overturned. But undoubtedly, some billionaires would recruit the best legal minds money can buy to try to defeat it.

Moving ahead, assuming the tax is passed and the Supreme Court neither strikes down the unrealized capital gains tax nor delays its implementation, there are still other risks to the revenue forecasts. Most notably, some billionaires may leave the United States and renounce their citizenship to avoid the new tax.  According to fintech startup Stilt, 5,313 Americans renounced their citizenship in 2020. Each quarter, the IRS publishes a list of individuals who have given up their citizenship or their U.S. resident tax status. Among the people who have appeared on these quarterly lists — rock star Tina Turner, Facebook co-founder Eduardo Saverin, and Campbell Soup heir John Dorrance III, the latter two of these individuals were billionaires when they gave up their U.S. passports.

More billionaires can likely be expected to initiate the renunciation process if their U.S. tax liability were to increase as it would under the billionaire tax proposal. At least a few are already well-positioned to take this step. For example, Peter Thiel has reportedly obtained New Zealand citizenship, while former Google CEO Eric Schmidt has obtained a European Union passport. With a total tax base of fewer than 1,000 individuals, the departure of just a few taxpayers could significantly impact revenue collections from a billionaire tax.

The Senate Finance Committee draft partially addressed the renouncement issue by requiring billionaires who give up their citizenship to pay any unrealized capital gains tax before leaving. If such a requirement passed legal muster and could not be circumvented, it would compel billionaires to pay taxes on their past gains but the federal government would still be deprived of revenues from future capital gains.

Finally, capital gains taxes may generate strong revenues when the economy is booming and could produce very little revenues during recession years.

It was wise for Congressional Democrats to shelve the billionaire tax proposal, but the issue seems certain to reemerge down the road. If and when it does, taxpayers should be skeptical that the tax would produce the revenues some proponents claim it would, especially in the absence of a CBO score.

The post Reasons to be skeptical of the potential revenues from the proposed billionaire tax appeared first on Reason Foundation.