July 19, 2006
Calculating the Cost of Tax Cuts
Last month, Citizens for Tax Justice (CTJ) published an analysis that looked at how federal tax cuts between 2001 and 2006 have affected taxpayers in each state. Most can take small comfort in any tax break they've received, says CTJ, because they'll pay for it later.
CTJ argues that these tax cuts — most recently providing temporary capital gains and dividends tax cuts plus AMT relief — are being paid for with borrowed money, since there's been no offsetting reduction in federal spending. In fact, the rapid rise in defense spending has further enlarged the gap that has to be filled.
According to CTJ's calculation, the average middle-income Minnesota family has received an average federal tax cut over six years worth $2,236 per family member. But it puts the family's share of the increased national debt at $9,679 per person, for a net debt of $7,443. (See here for the gory details on how tax cuts by state and income group were calculated.)
Of course, there's a certain amount of false precision in the per-person debt total, no matter how it was figured. And it's important to note that this caution about debt applies to federal tax cuts, not state cuts. Minnesota is required by constitution to have a balanced budget, so all state borrowing relates to bonding for specific projects.
Still, assigning a debt price tag works as another way to dramatize how so-called tax relief is almost never what it seems. Tax cuts come with an eventual cost, whether government cuts services, takes on debt, shifts costs or dis-invests. So before celebrating your reduced taxes, remember the burden doesn't go away, it just goes somewhere else.
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