New taxes: Will they help or hurt? Legislators consider long-, short-term effects

January 12, 1992|By David Conn | David Conn,Annapolis Bureau of The Sun

Annapolis -- Despite the call for higher taxes from the thousands of protesters who gathered here Wednesday night, most Republican and some Democratic lawmakers say raising taxes is anathema to a state in a recession -- like putting another bag on an exhausted pack mule.

Most attention in Annapolis is focused on new taxes: what kind and how much. But experts differ on the impact new taxes would have on an economy struggling amid the longest recession in recent history.

True, changing federal taxes can have a measurable and predictable impact on the national economy. But most observers agree that state tax policy has little effect on a state moving toward recovery, however slowly.

"In general, everything else equal, an increase in taxes will do less harm in the short run on an economy than a decrease in spending," said William F. Treacy, chief economist for MNC Financial Inc.

But then there's the long run. Some fear that higher taxes imposed by localities could drive out individuals and businesses with the wherewithal to move away, or drive off those who are otherwise inclined to come.

"You have to be really mad at the federal government to move out of the United States," said Lori L. Taylor, a senior economist with the Federal Reserve Bank of Dallas. "But you don't have to be that mad at the city of Baltimore to move to a suburb of the city."

The level of anger needed to drive businesses and wealthy people out of Maryland is another matter, but some lawmakers believe the frustration with taxes is growing to alarming proportions.

"It's real popular to talk about taxing the rich, but the rich have feet, and they can take their businesses elsewhere," said House Minority Leader Ellen R. Sauerbrey, R-Baltimore Co. And with an economy based two-thirds on consumer spending, Ms. Sauerbrey warned that a higher sales tax can only prolong the recession.

"I would argue that we have 7,000 retail employees that are unemployed, meaning that stores are not selling and meeting their payroll," she said. "It seems to me fairly obvious that even a 1 percentage point increase [in the sales tax rate] is going to" leave more workers unemployed.

A tax plan circulated last week by Sen. Laurence Levitan, D-Montgomery, chairman of the Senate Budget and Taxation Committee, would raise $623.4 million. Some proposals: boosting the sales tax from 5 percent to 6 percent, and applying it to various exempted items and services; changing the state income tax by adding a 6 percent rate to taxable income above $100,000; and changing the way some corporate taxes are collected.

Meanwhile, Gov. William Donald Schaefer, in his State of the State address Thursday, called for about $575 million in higher taxes and fees, including a 7.5 percent corporate tax rate, up from 7.0 percent. He also proposed that local governments be allowed to raise their share of the "piggyback" income tax and that the sales tax be broadened to cover many services and exempted items.

Tax foes, and some economists, point to the negative psychological effects of higher taxes during a recession marked by abysmal levels of consumer confidence. That could be important in a recession that has hurt such a broad spectrum of people, including many white-collar workers.

"So many people are asking if they could be next, and that could make the tax effect worse because more people are thinking about it," said Stanley Duobinis, senior vice president for regional economics at the WEFA Group Inc. in Bala Cynwyd, Pa.

And if the money from new taxes is perceived to be ill-spent -- propping up wasteful government programs, for example -- the benefits of increased spending could be outweighed by the cost of the higher burden on taxpayers.

"At this particular time, of course, you've got lots of retailers who are scared to death that any increase in taxes will result in even further cutbacks in spending," Mr. Duobinis added.

Thomas Fingleton, chairman of Arlington, Va.-based Hecht's department stores, agreed. "An increase in sales tax will probably reduce consumer spending," he said, "and not stimulate the economy."

But Senator Levitan rejects the argument that raising the sales tax is anti-growth. "I really don't believe that would have any adverse effect on the economy because I don't believe a penny on the dollar is going to stop anybody from buying anything," he said. "A $500 TV set would cost you five bucks more."

As for Eastern Shore retailers who fear losing even more consumers to sales-tax-free Delaware, Mr. Levitan argued that buyers of big-ticket items are going to Delaware anyway. And for those who aren't, "for a penny on the dollar you're not going to drive to Delaware. You're just not."

Still, some economists say that the negative effects of state taxes, whether income, sales or corporate, are negligible in the short-term compared to the size of the state's economy and to the budgets of most companies.

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