House Bill 508: Tax Attack

Q: What do a Houston pathologist, a University of Wisconsin-Madison economist, and state Rep. Lois Kolkhorst, R-Brenham, have in common?
A: HB 508.

The bill, authored by Kolkhorst, would require the comptroller’s office to spend $200,000 studying the effects of eliminating existing state taxes and the school property tax. In their place would be a statewide, electronically collected transaction tax, also known as an automated payment tax.

The system, developed by UW-Madison professor emeritus Edgar L. Feige, would tack a small tax (around 0.2 to 0.25 percent) onto every electronic transaction in the state. “Every transaction” would be, well, every time money goes from one person to another: a grocery store purchase, an accrual of interest, a major corporate acquisition. Because collection would be automated and electronic, cash transactions would not be taxed.

Right. So where does the Houston pathologist come in? He’s one of Kolkhorst’s constituents, according to Kolkhorst Chief of Staff Chris Steinbach. Bill Hermann has advocated national implementation of the tax since 2000, and he’s the one behind the bill. Hermann and his wife contributed $500 to Kolkhorst’s campaign in 2007.

A handful of blogs have already slammed the bill, claiming the tax would be regressive, or disproportionately burdensome on low-income folks. Kolkhorst’s office is aware of the bad buzz: “I don’t think we want it to be seen as some kind of regressive sales tax,” Steinbach says.

But the proposal’s regressive nature isn’t a bad assumption, according to Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities—though it’s hard to say for sure since no one has ever tried a scheme like this. Already, Mazerov says, Texas “has a very regressive tax structure” because there is no income tax. Eliminating the school property tax, the sales tax and the margins tax, which are designed to make the system a little fairer to middle-class and poor people, could result in a higher burden on these groups. The transaction tax would tax items that aren’t taxed now, such as food and medical care. These items are exempt from the sales tax to reduce the tax burden on poorer people.

Hermann sees this as a non-issue, claiming the tax “is progressive, too.” He says wealthy people spend more money, so they’d shoulder more of the burden.

Another issue is so-called “pyramiding” or “cascading,” which could mean that big businesses would pay less tax than small businesses and consumers, according to Mazerov. Big businesses deal with manufacturers directly, so they might pay the tax just once when they acquire goods. Smaller businesses and consumers might have to absorb that tax when they buy the product further down the supply chain–and then pay again when they make their own transaction.

Uneven burdens aside, UT-Austin accounting professor Michael Granof has other concerns: “The implementation in just one state would be quite difficult.”

The potential for tax evasion would be high, Granof says, because the tax would only be collected electronically, and only in the state of Texas. That means that not only would cash transactions go untaxed; so would out-of-state transactions. Employers could start writing checks out of state. Not to mention fat cats with money in the stock market in Manhattan—how could their transactions be captured? For these reasons, Granof says, the study called for in Kolkhorst’s bill would almost certainly fail to accurately estimate how much revenue the tax would generate.

That study also might not produce objective results. Kolkhorst’s legislation would require the comptroller’s office to consult with an expert team consisting of two professors (one of law, one of economics) from Texas universities—but also “persons who pioneered the concept of the transaction tax” (there’s only one: Feige) and “persons who direct national projects on transaction taxes” (without a doubt, Hermann).