@ INDEPENDENCE Su: INCA Issue Paper #1-92 August 1992 HOW COLORADO’S TAX STRUCTURE WILL SHAPE ITS ECONOMIC FUTURE Keying Policy to Private Sector Vitality, Not Public Sector Appetite By Vern Bickel and Barry Sandoval INDEPENDENCE INSTITUTE 14142 DENVER WEST PARKWAY, SUITE 185 GOLDEN, COLORADO 80401 (303) 279-6536 FAX (303) 279-4176 Note; The Independence Issue Papers are published for educational purposes only, and the authors speak for themselves. Nothing written here is to be construed as necessarily representing the views of the Independence Institute, or as an attempt to influence any election or legislative action,1-92 August 14, 1992 HOW COLORADO'S TAX STRUCTURE WILL SHAPE ITS ECONOMIC FUTURE Keying Policy to Private Sector Vitality, Not Public Sector Appetite By Vern Bickel and Barry Sandoval Introduction: Thinking Anew About Taxes and the Economy To begin shaping a tax policy for Colorado in terms of the desired impact on our state's economic future would mean adopting a whole new way of thinking. State tax policy at present is usually reactive and derivative, designed merely to increase revenues as close as possible to some ideal level of spending without antagonizing too many voters. Unfortunately, this traditional process of "need’- based tax legislation is not always conducive to economic growth and development, Indeed it often becomes an obstacle to job creation and the expansion of personal income. This paper invites consideration of a fundamentally different approach to tax policy: MOur state should shift from the prevailing budgetary style under which there is pressure for constantly higher taxes to pay for perceived "needs," to a strategic approach that would consider not solely the public sector's insatiable appetite but first and foremost the private sector's vitality. MPolicymakers should tailor our tax system so as to foster in Colorado a desirable mix of business, a steady trend of economic growth, and a higher stan- dard of living for all our people. MTax decisions must reckon with the fact that small businesses andprivate indi- When you tax something... you get less of tt. Here ts how policymakers could help, Colorado get more economic vitality, industry by industry, by minimizing the specific taxes that each feels most keenly. To maximize... Should minimize... Tourism —XSales tax, gas taxes, lodging tax, atrport fees. “Retirement Property tax, personal income Communities tax, sales tax, interest/divi- dend levies. vsmall XProperty tax pers. property Business _tax, pers. tncome tax, head tax, license fees, worker comp costs. “Larger xProperty tax differential,corp. Business income tax, pers.income tax, double taxation, patchwork of sales taxes and fees. YReal Estate _XProperty tax,personal income Values tax, transfer tax, capital gains inflation penalty. Agriculture xProp.tax, ine. tax, sales tax. “Welfare xWorkfare and learnfare re Caseload* quirements, differential below other states, eligibility and ‘waiting periods, means testing. AWage& ——_xProperty tax, income tax, spe- Salary al cistct debt (See also each Workers category of employers above.) ‘Test: Were you paying attention?viduals can and do "vote with their feet" by moving to another state with more favorable economic conditions. Stephen Moore of the Cato Institute calculated from census data that "on average, between 1980 and 1989, 1,000 people each day packed their bags and moved from the 10 states that raised their tax burdens the most" (Christian Science Monitor 5/10/91). Moore's data are one more instance of the key axiom of supply-side economics: X When you tax something, you get less of it. ¥ When you subsidize something, you get more of it. ‘We will argue that this axiom at the state level translates into a clear pattern whereby various types of economic activity thrive or stagnate (causing firms and individuals to stay in the state or move) based largely on the tax and regulatory environment that confronts them. Country after country in recent years has helped itself to dramatic gains in prosperity by recognizing this. The time has come for Colorado to do the same. The following overview of our state's major industries and economic constituencies does not attempt to trace quantitative trends of growth or decline as correlated to tax policy; rather it describes in broad conceptual terms the incentive effects that can be expected from various types and levels of taxation. Nor is the discussion intended to be comprehensive. It merely gives a number of illustrations of how this concept can be applied to both state and local government in Colorado. TOURISM: BECOMING COMPETITION-CONSCIOUS Tourism is one of the Colorado's largest industries, and much of the state's fame comes from its tourist attractions. However, this natural advantage Colorado has over other states in attracting tourism dollars could be exploited even further. While a visit to Aspen, Mesa Verde, or the Denver Museum of Natural History has intrinsic appeal, vacations are still more appealing if they are affordable. How does our existing tax mix measure up to that standard? Colorado has one of the highest gasoline taxes in the nation, When a visitor begins to feel (even if only subconsciously) that bite, and our lodging tax. and the $20 per head landing fee which was added to his plane ticket, and the tax on car rentals (or the $80 cab ride from the new airport to downtown), and the sales taxes on purchases made in the state, his vacation has suddenly become less pleasurable. These exactions by state and local government, after all, bring the tourist consumer (as a non-Colorado resident) no immediate perceived benefit whatsoever, and thus they diminish our state's attractiveness as a travel destination. Conversely, if a Colorado vacation were to become relatively cheaper as a result of policies