Posted on: Monday, December 24, 2001

Editorial
Latest tax proposals raise fairness questions

Taken individually, the latest round of tax proposals from Gov. Ben Cayetano make good sense.

Taken as a package, however, they raise questions of fairness and progressivity, which must be answered before they become law.

Effectively, Cayetano proposes to package a reduction in capital gains taxes with an increase in liquor taxes. The two parts make sense: Cutting capital gains will stimulate investment and presumably will draw money to the Islands.

Raising the tax on liquor is a classic "sin" tax. Generally speaking, taxes on such things as liquor and tobacco are eternally elastic; that is, the demand for the product remains relatively constant no matter how much it costs.

And if the higher taxes do discourage consumption, society benefits because it is clear that tobacco and alcohol use present us with measurable social costs.

But the problem here is in who pays the taxes and how the burden would be shifted. It is over-simplistic but not entirely inaccurate to say that the plan shifts some of the state's tax burden from Mr. Fat Cat to Joe Six Pack.

That's particularly true because of recent tax legislation that phases out the inheritance tax in line with changes to the new federal tax laws. This is truly a change that most benefits the wealthy.

As this proposal moves forward, it will be crucial to understand clearly what the intent is. Is it to stimulate investment, discourage drinking, please the wealthy or simply to keep state tax revenues on an even keel?

Generally speaking it never works to use tax strategy in pursuit of social or political policy.

The best tax policy is one that is fair, progressive and designed to cover only what the electorate had demanded, and no more.