Beware of permanent temporary tax increases

Milton Friedman once said, “Nothing is so permanent as a temporary government measure.” And that certainly includes “temporary” tax increases.

In Mississippi where I live and work, residents in the capital city of Jackson know that very well. Voters recently approved a $65 million bond issue to cover maintenance woes that have long plagued the Jackson Public School District. It was sold by supporters as “not a tax increase,” but a continuation of a previous tax increase from a previous bond measure that had been paid off.

Had voters in Jackson rejected the measure, there property taxes would have decreased five mills. The school district currently has, and will continue to have, the highest taxes in the metro area. Jackson residents pay 84.01 mills to support a school district that has been rated “F” by the state for the previous two years. Residents of nearby “A” or “B” rated districts pay between 54.55 and 67.94 mills.

But what occurred in Jackson isn’t much different than what we have seen throughout the country. And it’s been going on for longer than we probably imagine.

In 1936, Pennsylvania adopted the Johnstown Flood Tax, a temporary 10 percent tax on liquor to help victims of a flood rebuild. It was set to expire on May 31, 1937. That didn’t happen. By 1942, the tax collected $42 million and the town had been rebuilt. The tax remained. Eighty-two years later, the temporary, 10 percent tax is now a permanent, 18 percent tax.

Temporary taxes became very popular during the recession a decade ago. Faced with shrinking revenue, states and municipalities enacted numerous “temporary” tax measures. Many were either made permanent or replaced with new taxes.

In California, personal income taxes were increased by 0.25 percent on all rates and the sales tax rate increased from 7.25 percent to 8.25 percent. They both expired, but were replaced by new taxes via referendums. The sales tax rate was increased to 7.5 percent, a quarter-point increase from the original rate and personal income taxes on top earners were increased.

In Connecticut, a temporary 10 percent corporate income tax surtax was extended twice and increased to 20 percent.

In Delaware, the state temporarily increased the income tax rate for top earners from 5.95 percent to 6.95 percent. By 2014, the increase had been reduced to 6.6 percent as it was made permanent. Residents were still hit with a .65 percent increase. Estate and business tax increases were also made permanent.

In Kansas, sales tax rates were temporarily increased from 5.7 percent to 6.3 percent. The state then reduced the rate to 6.15 percent and made it permanent, reflecting a .45 percent increase.

And more recently in Louisiana, the state temporarily raised sales tax rates from 4 percent to 5 percent. The tax increase was set to expire on June 30 of this year. Instead, the state adopted a 4.45 percent sales tax, a .45 increase from the previous tax rate.

One could argue that many of the recent tax increases made permanent were actually at lower rates than their original temporary hikes; thereby resulting in tax “relief.” This is similar to calling a 3 percent increase to a government agency a “reduction in spending” or a “cut” because the agency had planned or requested a 5 percent increase in its budget.

It’s semantics, and everyone knows it, especially the proponents of the higher taxes. In many places, residents are paying higher taxes than they were prior to the recession. Calling it by another name does not stop it from being a net increase, even if it is slightly less than the “temporary” increase.

The goal, amongst the tax proponents, is for residents to get use to the higher tax and eventually it just becomes accepted. Then when a tax increase expires, or a bond is paid off, a politician or government agency bureaucrat tries to convince you that this new tax increase is not an increase at all, but rather, it is a commendable action to keep your tax rates the same.  It’s like magic. Think of it is a slight of words, rather than a slight of hand.

So the next time you hear a politician sell you on a “temporary” tax increase, smile and tell them you’ve seen this act before.