Thursday, January 25, 2001
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Posted on: Thursday, January 25, 2001

It's self-defeating to cut excise taxes

The Republicans came to this year’s legislative session leading the charge to eliminate state excise taxes on food, medical services and rent. It’s a populist idea that’s easy to sell, so a goodly number of Democrats have been signing on to the bandwagon.

Sorry to rain on your parade, Gov. Ben Cayetano told them, in effect. He said he’d veto any excise tax cut.

It’s no fun to play the Grinch, but Cayetano is right. Cutting excise taxes would be a mistake, for two reasons:

It’s still unclear that lawmakers can afford to have their cake and eat it, too. That is, they are eager to enact an ambitious and popular agenda of spending increases. But eliminating excise taxes on food, rent and medical services would result in an annual loss of $180 million to $230 million in tax revenues.

Yes, there’s something of an economic recovery under way, but no one yet knows how strong it is, how long it might last.

If it becomes clear that a tax cut is prudently possible, cutting excise taxes is the wrong way to go about it.

To be sure, the worst feature of the excise tax on food, rent and medical services is that it is distinctly regressive. Our working poor cannot escape paying for these items, and rich people use them only marginally more than the poor.

Yet tourists currently pay a substantial portion of the receipts from this tax — exporting the tax, if you will. Eliminating excise taxes would amount to a huge and unwarranted tax cut for visitors.

Restoration of income tax credits to offset food, rent and medical services expenditures, perhaps with modest caps, would assure these tax breaks would go to those who need them most, without shifting more of the load to residents.

Once lawmakers are assured that they can spend more and cut taxes, then the tax credit mechanism is the way to go.

Cayetano has made it clear that eliminating excise taxes is going nowhere this session. So lawmakers, if they are more interested in constructive change rather than debating points, should look to compromise.

Restoration of tax credits on food, rent and medical services will accomplish the same thing proponents of this plan have in mind — if helping the poor is what they had in mind — while continuing to "export" a substantial share of the tax bite to visitors.

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