Federalism Revisited: An Anecdote on State Sales Tax Independence

In their example on the shopping habits between the states of Washington and Oregon, Arthur B. Laffer, Stephen Moore, and Jonathan Williams (authors of Rich States, Poor States) describe how consumer behavior is effected by the difference in retail sales tax between the two states of Washington (9% sales tax, and 0% income tax) and Oregon (0% sales tax, and 9% income tax). A study conducted by the Wall Street Journal found that, despite having measurably less money to spend, the Oregon region maintained more retail dollars earned compared to Washington. A similar type of event happened in the late 70’s when Delaware, possessing the U.S.’s highest income tax, found itself as also maintaining the highest retail sales per dollar of reported income (Laffer, Moore, and Williams, 2009, 38-39).

How does such consumer behavior affect Oregonian decision-making as the leading purveyors of the ‘smart growth’ and regional development movement? Their conscious decisions to make driving more difficult – to encourage rail use – impedes traffic in a way that planners considered fruitful, but have also proven to worsen congestion as people continue to prefer driving. This analysis, lifted from Randall O’Toole’s paper The Folly of Smart Growth, is disingenuous when the economic rationality of the consumer is brought into play. A good example of this is when O’Toole argues, “Public transit carries less than three percent of Portland-area passenger travel, yet for nearly two decades the region has invested some two-thirds of its transportation dollars into light rail and other transit rather than roads (O’Toole, 2001, 23).”

This three-percent figure erroneously implies that the Portland-area passengers as all residing in the city of Portland or the state of Oregon. From this logic O’Toole concludes that “As a result, thousands of commuters who moved to Vancouver, Wash., to escape Portland taxes and land-use regulation now face huge delays in commuting to Portland each morning (23).” Here O’Toole is arguing that those individuals, who moved to Washington to avoid the state’s income tax, but work – and likely shop – in Oregon, are being put ‘on the outs’ because of bad growth policy. The reality of the situation is that these commuters only ‘suffer’ because of bad tax policy cooperation between the two cities which has allowed them to free ride upon both Oregon and Washington’s different tax systems, it just takes them longer to get there.

In an attempt to resolve the congestion, Metro, the Portland area transit authority, suggested construction of light rail between Portland and Vancouver. Metro requested that Vancouver residents pay $480 million toward the project, but city voters soundly rejected that request. O’Toole argued that “[Vancover’s] decision is supported by a careful analysis of the economics of such projects: A typical light-rail line costs as much to build as a four-lane free- way, yet no light-rail line in the nation carries half as many people as a single lane of a typical urban freeway. Widening I-5 to three lanes for the two miles that are now bottlenecked would cost only about $10 to $20 million and would increase flow capacities by far more than would be carried on the light rail. But Metro will not allow the highway expansion until the light-rail line is fully financed (23-24)” although recently this project has actually been undertaken, although not probably in the timely fashion as Vancouver resident’s would have wanted. But as before, this is a disingenuous argument that relies on the notion that Vancouver, Washington residents should have a say in how Portland, Oregon develops despite doing their best to avoid paying for any of the public infrastructure which they use daily.

The above example is a good case for federal intervention to traditionally independent state and local sales taxes. The resulting interstate policies (or lack thereof) of the development of independent tax systems have resulted in some instances where states and municipalities play residents off of neighboring communities, usually to the detriment of the nation as a whole. The above example shows how fighting between one community’s vision of an environmentally friendly and dense urban society competes with another community’s vision: a bedroom community a quick drive away from work.

This competition leads to inefficiencies where neither community truly wins, and arguably, have both lost. Perhaps the incursion of a federal value added tax at 5%, as has been quietly discussed in Washington D.C., could discourage this type of competitive behavior by decreasing revenues for states and locals that take advantage of areas where there is little to no federal incursion upon taxation.

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~ by StateHate on November 29, 2009.

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