An Econ Lesson for Governor Blagojevich
By
Greg Blankenship
When
government hikes taxes government tends to receive less revenue
than expected, and when government cuts taxes government tends to
lose less revenue than opponents of tax cuts contend. This
is because changes in tax policy influence the way economic actors
behave. Its simple really if you
want less of something tax it, if you want more, dont.
This
simple generalization is important to know to if you are going to
successfully govern a large state.
One
person apparently oblivious to this is Illinois Governor Rod Blagojevich.
Governor Blagojevichs FY 2004 Budget imposed some $1 billion
in business fee and tax hikes. But just as the general rule
defined above says, it is unlikely Illinois will generate that kind
of revenue as businesses and individuals seek to avoid the new taxes.
As a result Illinois can expect to see less business economic activity.
In fact, we already see this developing in one of the more controversial
industries the states riverboat casinos.
Businesses
are tax collectors, not tax payers. When confronted with tax
hikes business managers will pass along the costs to customers in
myriad ways. They might raise prices on their products and
services, or cut out discounts and no longer offer perks to patrons.
Others may cut back efforts to produce products and services because
it is plainly evident that it is no longer worth effort to go the
extra mile only to hand over the returns to the tax collector.
Illinois
casinos pay taxes based on adjusted gross receipts, license fees
and an admissions tax. After tax hikes last year, Illinois
anticipated riverboat casinos would contribute an additional $130
million in revenue. Instead only $114.7 million made it into Illinois
coffers . In this years budget, the Governor hiked
taxes by $200 million with a top rate of 70 percent on the largest
riverboat casinos. Last year to adjust to the new 50
percent tax rate the riverboats began cutting corners, thus making
casinos less fun . As a result, casino attendance began to
drop off .
In
response to all these tax hikes, casinos have increased admission
fees, implemented parking fees, increased prices of food and drinks
in an effort to adjust to the new tax environment. Here, the casinos
have opted to pass the burden of new tax increases on to customers.
This has resulted in customers fleeing to competing Indiana casinos
where fees and costs are lower.
The
situation has become so acute that the state Economic and Fiscal
Commission has noted, "That a disturbing trend may be developing
in the riverboat industry
" The Commission is expected
to release a report on state gaming this month. If attendance
continues to spiral downward, then riverboat revenue will fall significantly
short of the projected $200 million by Governor Blagojevich, according
to the Commission.
Another
strategy is to simply not work as much. Riverboat casinos
have asked the state gaming board to allow riverboat casinos to
reduce their hours to save money. According to newspaper reports,
at least 4 riverboat casinos have laid off 200 or more workers.
Moreover, the casinos are canceling construction projects that have
resulted in the evaporation of potentially 29,000 new construction
jobs.
Whether
you are a proponent or opponent of the casinos, riverboat casinos
continue to prove themselves to be a great example of how businesses
avoid earning that extra dollar if doing so results in being taxed
at a confiscatory rate. It also demonstrates the folly of leaders
who dont understand basic economics.
The
Governor charges that the casino industrys actions are "cynical"
attempts in tax avoidance. The casinos claim they are
reducing costs to pay increased taxes. Economists would agree
that the casinos are the ones acting rationally here, not
our Governor.
Leaving
aside the fact that any business has a moral and legal responsibility
to its shareholders to maximize profits and reduce costs, there
will be numerous other industries working to avoid the new business
and tax fees as well.
One
example is the transportation industry. It is being socked with
a $1.50 hike in tire disposal fees to $2.50 and new taxes on rolling
stock that means businesses that purchase fleet vehicles are now
forced to pay sales taxes on new vehicles. Will the Governor
label them cynical for holding off on new purchases of vehicles
and tires? Will auto makers be labeled as cynical for laying off
autoworkers who build the vehicles that wont be purchased
thanks to the Governors budget?
The
Governor came into office promising to end business as usual.
His first budget seems more geared toward just ending business.
Lets hope that he learns this important but simple lesson.
Greg
Blankenship is Founder and Director of the Springfield-based Illinois
Policy Institute (www.illinoispolicyinstitute.org).
[Posted
September 18, 2003]
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