Issues & Insights

Yet Another Tax Bait-And-Switch?

Homeless and hungry in front of New York's Madison Square Garden. Photo: ScifoRobert, licensed under the Creative Commons Attribution-Share Alike 4.0 International license (https://creativecommons.org/licenses/by-sa/4.0/deed.en).

If you saw someone holding a “homeless and hungry” sign, you might suspect that money given them would go toward something other than housing or food. You would probably hope government would be more reliable in spending tax dollars, given their constantly repeated rhetoric of doing the best for their citizens. However, that may be overly optimistic.

Massachusetts is poised to be the latest test case, with a four percent millionaire’s surtax promised to generate nearly $2 billion annually for education and transportation, reportedly on the “fast track” to next year’s ballot.

However, as Greg Sullivan of The Pioneer Institute has pointed out, it could well just go wherever the legislature wants, because it “doesn’t actually require that the legislature increase spending on education and transportation.” That is especially true given that two amendments mandating that such new revenues would go where promised were rejected by state legislators during the 2019 constitutional convention.

Unfortunately for Massachusetts’ citizens, there is a long history of budgetary “bait and switch” that provides lots of credibility to the proposal’s opponents. Opponents point to the 2012 California tax hike, which was promised to increase education spending, but almost all of the money beyond the state’s Constitution mandated 40% was redirected elsewhere, as particularly ominous, as Massachusetts has no such mandate.

But there is not just a single such example. They are plentiful. The diversion of funds from where politicians promise is political fact of life, undermining any confidence in such promises.

California, where I live, provides plenty of evidence all by itself. In 2019, when Governor Newsom’s water tax to fund contamination cleanups was rejected, $100 million in state cap-and-trade funds earmarked for projects to reduce greenhouse gases was simply diverted for it (despite a $20 billion-plus budget surplus).

A few years earlier, California’s Proposition 56 hiked cigarette taxes to, as the Los Angeles Times endorsement put it, “pay healthcare providers more to treat Medi-Cal patients.” But it didn’t happen that way.

Shortly before that, Oakland passed a tax on sugary beverages to finance health and education programs, backed by an advisory board to ensure the money was well spent. But the mayor quickly sought to divert $6 million elsewhere.

Diversions of earmarked bond revenues have been so common that citizen oversight boards are now routinely created (with limited actual effect) to convince voters of public agency trustworthiness, this time. State lottery funds promoted to supplement education have met a similar fate.

Politicians, taking into account those additional funds, reduce other budgetary support, freeing up money to be spent however the state government decides, just as if the lottery proceeds went directly into its general fund. As professors Patrick Pierce and Don Miller concluded in a study of education funding, “Regardless of the state, the educational spending rate declined once a state lottery went into operation.”

Even when government spends money where they promise, the effects frequently differ from those advertised. For instance, food stamps (SNAP) are largely equivalent to cash, because the vast majority would purchase more food than their food stamp allotments. That allows food stamps to replace money that recipients would have spent on food anyway, freeing dollars up for whatever purpose they choose.

Housing, winter heating and other subsidies have similar effects, because they also replace money that would have been spent on those items, freeing funds for diversion to wherever recipients select.

Similar diversions have also often hobbled the effectiveness of humanitarian foreign aid. It frees up resources otherwise required to buy such supplies to be spent wherever the recipient government chooses. As a result, much is lost to corruption or converted to other uses, including military spending, sometimes used to threaten citizens or neighboring countries.

The history of governments diverting designated funds to “blank checks” justifies cynicism of each “new and improved” version it promotes to get more money out of citizens’ pockets. That cynicism is heightened because even when government does what it says, the results are often far different than intended.

That is worth remembering every time “public servants” put out their “hungry and homeless” signs again. As the French economist Frederic Bastiat said long ago, “Our own ignorance is the primary, the raw material of every act of extortion to which we are subjected.”

Gary M. Galles is a professor of economics at Pepperdine University.

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