Susan Pace Hamill: The Vast Injustice Perpetuated by State and Local Tax Policy

Hamill-HofstraSubmission.pdf (application/pdf Object). or http://ssrn.com/abstract=1272155

Susan Pace Hamill, one of my heroes, has published a new paper in the Hofstra Law Review, and while I share her concern for the poor and for economic justice, and I respect her scholarship, I think she’s missing the most important questions! Here’s the abstract; the emphasis is mine:

State and local tax policy is one of the most important areas of public policy affecting the lives of the most powerless and vulnerable segments of the population – children from low income families. Focusing on the funding of primary and secondary education, especially in high poverty school districts, and the scheme for allocating the tax burden, this article empirically proves that all fifty states have unjust state and local tax policy, with thirty-one states inflicting an extreme level of injustice on poor children and their families. This article argues that the people in most states, as well as their political leaders, are compelled to reform state and local tax policy because they claim to practice Christianity or Judaism, and, in addition to being unjust under secular-based ethical models, their state and local tax policy also violates the moral principles of Judeo-Christian ethics. This article also argues that the moral context of a faith-based appeal offers the best chance to inspire people to support tax policy, requiring greater levels of sacrifice from wealthier Americans, a group that must be part of the reform effort in order to change the state and local tax picture from a vast sea of injustice to a tool of justice protecting our most vulnerable and powerless citizens.

I would counter that our tax policies should not require “greater levels of sacrifice” from anyone. But Professor Hamill, like 99% of the rest of the people who think about public finance and economic justice, seem to be stuck in a box, and it is the wrong box!

In a section entitled “The Criteria for Morally Evaluating State and Local Tax Policy,” Hamill writes,

A tax is a compulsory payment imposed by the law on the citizens of a state or a nation in order to meet public needs. Without governmental powers to tax, civilization would quickly fall into anarchy. All tax policy issues essentially boil down to two questions – what level of revenues should be raised (meaning what constitutes public needs), and how should the burden for paying taxes be allocated among those at different levels of income and wealth? Public needs can be defined to only cover the barest essentials of the minimum state such as defense, law enforcement and the courts, or it can be expanded to include other areas such as education. Generally there are three broad options for allocating the burden for paying taxes, which measures the tax burden as a percentage of available income.

Regressive models impose larger proportional tax burdens at lower income levels and smaller proportional tax burdens at higher income levels.
Proportional or flat models impose roughly the same proportional tax burden at all income levels.
Progressive tax models impose greater proportional tax burdens as income levels rise.

Due to the compulsory nature of taxation, defining the level of revenues and the scheme for allocating the tax burden raises justice issues, which in a democracy will reflect the moral values of the population.

Her analysis completely ignores the fact that it matters greatly what we tax, and that some taxes are vastly superior to others, both in terms of their economic justice and in terms of their effects on our economy.

The problem is not that we are not taxing enough, or that our taxes are not sufficiently progressive. Rather, the problem is that we are taxing the wrong things: taxing that which we ought not to tax, and taxing lightly or not at all that which we ought to tax rather heavily.

Hamill goes on to say,

The moral principles of Judeo-Christian ethics explicitly guides how the burden for paying taxes should be allocated among people enjoying different levels of income and wealth. Illustrating special concern for the poor, these principles forbid oppression. Oppressive laws actively make a person’s already precarious situation worse, foster exploitation, or unreasonably stand in the way of a person’s progress towards reaching his or her potential. Tax laws that burden those in poverty or that have regressive effects on the lower middle classes are oppressive and therefore immoral. This is because people who are already struggling financially need all of their available resources to meet basic needs and improve their situation.

This statement ignores the important fact that there are various KINDS of income and wealth, and that some are rightly private property (and therefore private and not subject to socialization), and some are rightly common property (that is, subject to socialization and not subject to privatization by anyone). When we tax that which should be private, we wrong our fellow human beings; when we fail to tax that which should be common, we also wrong our fellow human beings. And when all we talk about is total revenue, and ignore the sources, we get both injustice and a fouled-up economy.

Professor Hamill, for all her concern for the poor, fails to see the important distinctions here. The poor suffer from injustices, and collecting more taxes from the wrong tax bases does not reduce that injustice by the slightest.

She continues,

The Judeo-Christian teachings on wealth establish moral principles that require greater financial sacrifices from those enjoying greater levels of income and wealth.

I will argue that “financial sacrifices” are not called for; that is, I do not want to take from anyone that which he has created. I do not consider that in calling for us to collect for the community that which the community has created, I am not calling for anyone to sacrifice. Rather, I seek to collect that which we have failed to collect. Some who are used to privatizing value the community creates might consider it a sacrifice to give it back, but they will need to adjust.

Having said that, let’s continue with Professor Hamill’s analysis. She writes,

After considering numerous education cost-out studies and the opinion of two prominent experts, this article establishes the approximate benchmark for testing the adequacy of K-12 funding at $10,000 per child.26 This creates a rebuttable presumption that K-12 funding approaching or exceeding $10,000 per child meets the moral requirement of reasonable opportunity, and K-12 funding below that threshold does not.

I’m with her on the first sentence. I think that amount needs to be varied according to the local cost of living; $10,000 per child in rural Alabama probably buys more than does $10,000 per child in the Bronx or Westchester County, NY.

But at “the moral requirement of reasonable opportunity,” she loses me. What she doesn’t see – and I would not expect an ordinary layman to immediately see it, but would expect that someone who has thought deeply about taxation and about justice might – is that simply educating a child adequately and sending them out into an unjustly structured economy and society does NOT meet “the moral requirement of reasonable opportunity.”

And when we tax that which we shouldn’t, and fail to tax heavily that which we should, we create a society and an economy which provides minimal opportunity to support oneself and create prosperity for all.

The article continues,

… this article assumes that high poverty school districts should be funded at approximately forty percent more than the $10,000 per pupil required for school districts generally, thus creating a rebuttable presumption that a state must spend $14,000 per child in high poverty school districts.

I can see the logic in that, and am in general agreement with the concept. But much depends on how one defines income poverty. Our federal definition – for 2008, an annual income of $21,200 for a family of 4 – means one thing in rural Alabama and quite another in the Bronx or Westchester County, NY. And a 10% or 20% or 30% poverty rate in the public schools means one thing in rural Alabama and quite another in metro NYC, where an income of 200% or even 300% of the Federal Poverty Level is still insufficient to meet a family’s most modestly-defined needs. Perhaps a poverty definition which relates to the percentage of students eligible for free or reduced price lunches might be a better measure than the one-size-doesn’t-fit-all Federal Poverty Guideline.

Hamill divides the 50 states into several groups, based on the adequacy of their spending and the regressivity/progressivity of their local and state tax burden when comparing the top and bottom income quintiles:

II. Thirty-One States Grossly Violate the Moral Principles of Judeo-Christian Ethics A. The Foul Fifteen: They are “Less than Nothing” The fifteen states with the most immoral state and local tax policy in the country, listed alphabetically, are: Alabama, Arizona, Arkansas, Colorado, Florida, Idaho, Mississippi, Nevada, North Carolina, Oklahoma, South Dakota, Tennessee, Texas, Utah and Washington. They spend less on K-12 education than almost all other states across the nation and fail to even come close to meeting the reasonable opportunity requirement. Almost all of these states spend less than $8,000 per child in overall K-12 funding, which does not even approach $10,000 per child. Even worse, almost all of these states spend less than $8,000 per child in high poverty school districts, which is even further away from $14,000 per child.

In addition to offering the least support for K-12 funding, especially for poor school districts, the schemes for allocating the tax burden in eleven of these fifteen states are among the most regressive in the country. Four states, Florida, Arizona, Oklahoma, and Washington, are grossly regressive, with Washington as the worst, pulverizing the poor with state and local tax burdens reaching almost nineteen percent of their income and a spread exceeding fifteen percentage points between the burden on the poor and the burden on the wealthiest households. Seven states, South Dakota, Texas, Tennessee, Nevada, Arizona, Colorado, Alabama and Arkansas, are extremely regressive.

Most of the eleven states with grossly or extremely regressive tax burdens rely on sales taxes for more than forty percent (in some cases more than fifty percent) of their tax revenues, and they tend to impose sales tax burdens on the poorest households that approach, and in some cases exceed, ten percent of their income. These states tend to raise insufficient revenues from property tax sources, impose heavy property tax burdens on low income households, or both.51 Six of these states, Florida, Nevada, South Dakota, Tennessee, Texas, and Washington, have no broad-based income tax. These states must adopt as a significant source of tax revenue an income tax that has substantial progressive features. The broad based income taxes that exist in Alabama, Arizona, Arkansas, Colorado and Oklahoma provide less than a quarter of their tax revenues and are among the least progressive in the nation.

51 Due to the complexity and heavily local emphasis of property tax structures, this article only notes the degree to which the states rely on property taxes as a source for tax revenues and allocates the property tax burden among households at different income levels. Alabama, Arkansas, and Tennessee rely on property taxes for less than twenty-five percent of their tax revenues, and the property tax burden in all income groups is less than two percent of income. Oklahoma also relies on property taxes for less than twenty-five percent of its tax revenues, but the property tax burden on the poorest households exceeds four percent of income. Colorado, Florida, Nevada, South Dakota, Texas and Washington rely on property taxes for more than twenty-five percent, but not as much as forty percent, of their tax revenues, and the property tax burden on some poor and lower middle class households exceeds three percent of their income. Texas relies on property taxes for more than forty percent of its tax revenues and imposes a property tax burden on most income groups (except the wealthiest households) that exceeds three percent of income.

B. The Shameful Sixteen: They are “Nothing”

The states classified as the “shameful sixteen,” listed alphabetically, are: California, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Missouri, Nebraska, New Mexico, North Dakota, Pennsylvania and Wyoming.62 Like the states on the list of the foul fifteen, as a group these states grossly violate the moral principles of Judeo-Christian ethics due to inadequate funding of K-12 education, especially in high poverty districts, and unfair tax burden schemes that meet the definition of being “grossly regressive”, “extremely regressive” or “very regressive.” However, despite this strong resemblance to the worst states in the country, the balance between their funding for K-12 education and their scheme for allocating the tax burden distinguishes these states as having tax policy that is slightly less immoral than that of the states classified in the foul fifteen. …

III. Nineteen States Fail Judeo-Christian Moral Principles for a Variety of Reasons

A. The Shoddy Seven and the Endeavoring Eight

Although none of the remaining nineteen states meet the moral principles of Judeo-Christian ethics, they present a considerably more complex picture than the thirty-one worst states in the country. This article describes seven of these states listed in alphabetical order, Maryland, Minnesota, New Hampshire, Ohio, Rhode Island, Virginia and Wisconsin, as the “shoddy seven” because they superficially appear to be far better than they actually are. In these seven states, the overall K-12 funding per child either exceeds or approaches the $10,000 benchmark for the rebuttable presumption of adequacy. However, in these states, the K-12 funding per child in the poorest school districts strongly resembles the nine states within the shameful sixteen that have grossly or extremely regressive schemes for allocating the tax burden – better than the states classified among the foul fifteen but not even close to the $14,000 benchmark for the rebuttable presumption of adequacy. …

Eight of these nineteen states can be described as the “endeavoring eight” because they are closer to meeting one of the moral requirements than most of the other states but fall far short in the other requirement.86 Four of these states, Alaska, Connecticut, Massachusetts and New Jersey (listed alphabetically), allocate the burden for paying taxes in a very regressive manner.87 However, in each of these states, overall K-12 funding is among the highest in the nation and greatly exceeds the $10,000 rebuttable presumption of adequacy. In addition, K-12 funding for the poorest school districts is also among the highest in the nation, either exceeding or approaching the $14,000 rebuttable presumption of adequacy. However, within individual school districts, especially the poorest districts, great funding disparities exist resulting in some high poverty districts being funded at levels substantially less than the average for these poor school districts, and thus further away from the $14,000 rebuttable presumption of adequacy.

B. The Front-Running Four

For a variety of reasons, four of these nineteen states (listed alphabetically) stand out: Delaware, Maine, New York and Vermont.100 When balancing all of the criteria, these states arguably come closer to meeting the moral principles of Judeo-Christian ethics than any of the others. Unlike the states described as the “endeavoring eight,” none of these states fall far short of the moral standards in either the K-12 funding areas or the scheme for allocating the tax burden. Moreover, these states offer a better combination of K-12 funding and less regressive features than the states described as the “shoddy seven.” …

All four of these states are among the least regressive in the nation.103 Unlike any of the other states among the least regressive in the nation, they greatly exceed the $10,000 per child rebuttable presumption for adequacy in overall K-12 funding.104 Although their spending for high poverty districts is below the $14,000 rebuttable presumption of adequacy, it is still among the highest in the country. Except for Delaware, these states rely on sales taxes for more than a quarter of their tax revenues and impose unacceptably high sales and property tax burdens on poor and lower middle class households. Although the income tax structures in all four of these states contain exemption levels above the poverty line and have some progressive features, they fail to meet any reasonable definition of a moderately progressive model.

This post is longer than I intended it to be, but I thought Professor Hamill’s material interesting. What would I like Professor Hamill to know? That all taxes are not created equal; that it matters greatly what we tax, and that we ought not to tax some things at all, and that we ought to tax some things quite heavily. I’d encourage her and her excellent researchers to take a look at these articles:

Dave Wetzel: Who Should Get the Land Rent? at http://www.wealthandwant.com/docs/Wetzel_Westminster.htm

and, about opportunity, Mark Twain: Slavery at http://www.wealthandwant.com/docs/ajo_slavery.html James Kiefer: Fr. James Huntington and Henry George’s Ideas, at http://www.wealthandwant.com/docs/Kiefer_Huntington.htm

and a YouTube video at by Fred Harrison entitled Ricardo’s Law ~ The Great Tax Clawback Scheme, at http://www.youtube.com/watch?v=6ZkfmY1PMng