TAX FEARMay 1993 Volume 37, Number 4

TAX 'top.

FOUNDATION

If the Clinton administration's broad -based energy tax proposal is enacted byCongress, it would hit some states far harde rthan others, according to a new analysis byDr. Arthur Hall, Senior Economist at the TaxFoundation . The tax—based on Britishthermal units, or Btu's—would have anespecially harsh impact on Texas and Califor-nia, where average annual energy tax burdenswould be twice the level of the third hardesthit state, Ohio .

In fact, in 1996—the first year the tax isphased in fully—Texas could pay over 75 time smore in energy taxes than Vermont, the least-affected state . Other states that would bear adisproportionate amount of the total energ ytax burden include New York, Pennsylvania ,Illinois, Louisiana, and Florida .

The analysis was based on the Departmen tof Transportation's most recent assessment of

Energy Tax Plan continued on page 2

1996 Btu Tax Burden Per Household By State

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FRONT &CENTER

Lieutenant Governor Nick A . Theodore(D-South Carolina)

4-5

2

Estimated 1996 Btu Tax Burden By State and Sector($Millions)

Residentia lSector

Commercia lSector

IndustrialSector

Transportatio nSector Total

Stat eRan k

Alabama $ 77 .6 $45.5 $197 .7 $110 .5 $431 .3 1 7Alaska 13.2 16 .3 82 .8 47 .2 159 .6 3 6Arizona 54.7 57 .2 50 .1 89 .4 251 .4 2 9Arkansas 44.2 28 .1 79 .4 62 .8 214 .5 3 3California 350.4 357 .0 518 .4 779 .1 2,004 .9 2Colorado 56.4 62 .9 56 .8 74 .4 250 .5 3 0Connecticut 61 .0 47 .3 36 .2 56 .4 200 .9 3 4Delaware 12.3 9 .3 25 .7 17 .3 64 .6 4 7D .C . 9 .0 21 .0 9 .1 7 .4 46 .5 5 0Florida 221 .5 189.5 116 .9 311 .5 839 .4 8

Georgia 118.7 88 .4 174 .5 187 .4 569 .0 1 2Hawaii 6 .9 12.4 19 .8 43 .0 82 .0 4 5Idaho 20 .5 19.0 37 .8 24 .9 102 .3 4 1Illinois 227 .9 177 .9 328 .9 235 .4 970 .0 6Indiana 113 .0 73 .3 324 .3 159 .1 669 .8 1 0Iowa 55 .7 37 .2 89 .7 64 .1 246 .7 3 1Kansas 49 .2 44.8 111 .3 77 .4 282 .7 2 6Kentucky 69 .9 46.9 178.8 103 .4 399 .0 1 9Louisiana 80 .0 58.9 623.3 196 .5 958 .6 7

Maine 21 .8 15.9 30 .3 31 .6 99 .7 4 2Maryland 84 .3 44.8 113 .3 90 .8 333 .2 2 4Massachusetts 106 .2 91 .1 59 .7 111 .0 368 .0 2 2Michigan 183 .5 129 .5 250 .6 186 .4 750 .0 9Minnesota 82 .2 53 .1 133 .6 92 .7 361 .6 2 3Mississippi 45 .8 28 .6 101 .2 81 .2 256 .9 2 7Missouri 102 .1 77 .8 94 .8 130 .2 405 .0 1 8Montana 16 .1 13 .8 40 .1 22 .7 92 .8 43Nebraska 32 .7 30 .0 35 .2 41 .4 139 .4 38Nevada 22 .6 18 .7 29 .8 36 .4 107 .4 40New Hampshire 19 .2 11 .2 16 .3 20 .0 66 .6 46New Jersey 129 .2 128 .8 143 .8 218 .4 620 .2 1 1

New Mexico 20 .5 25 .8 54 .4 63 .1 163 .8 35New York 260 .5 278 .0 191 .7 253 .2 983 .3 4North Carolina 121 .2 91 .1 174 .6 147 .5 534 .5 1 4North Dakota 13 .6 10 .6 42 .0 18 .0 84 .2 44

Ohio 214 .2 157 .7 424 .3 218 .5 1,014 .7 3Oklahoma 70 .5 52 .9 153 .2 94 .3 371 .0 2 1Oregon 55 .7 44 .9 76 .5 77 .5 254 .6 2 8Pennsylvania 218 .8 142 .1 387 .6 231 .3 979 .7 5

Rhode Island 16 .5 11 .3 9 .8 15.8 53 .5 4 9South Carolina 63 .8 43 .9 135 .1 84.7 327 .5 2 5South Dakota 14 .4 8 .6 14 .8 18.0 55.9 4 8Tennessee 102 .0 54 .4 197 .6 126 .9 481 .0 1 6Texas 312 .9 270 .1 1,507 .5 597 .6 2,688 .1 1Utah 26 .9 22 .9 58 .2 41 .0 149.0 3 7Vermont 10 .5 6 .5 6 .2 11 .6 34 .7 5 1Virginia 111 .2 102 .0 131 .4 159 .5 504 .1 1 5Washington 102 .9 79 .3 196 .5 157 .1 535 .9 1 3West Virginia 34 .3 23 .7 123 .4 39 .9 221 .3 3 2Wisconsin 92 .0 62 .8 126 .4 93 .5 374 .7 2 0Wyoming 9 .4 10 .5 66 .7 22 .7 109 .3 3 9

United States $ 4,359.5 $3,535 .3 $8,189 .7 $6,182 .1 $22,266 .7

Source : tax Foundation computations using Commerce Department energy consumption data .

Continuedfrom Page I

energy consumption by state and on th eTax Foundation's projection of taxburden by state in 1996 . The analysis i sbased on the administration's goal o fraising $73 billion over a five-yearperiod .

States with large industrial andtransportation sectors will be hitespecially hard . As seen in the accompa-nying table, the industrial sector in Texaswill shoulder over half the state's Btu taxburden . In California, it's the transporta-tion sector that carries the inordinat eload, yielding almost 40 percent o fCalifornia's energy tax revenue in 1996 .Combined, the industrial and transporta-tion sectors in Louisiana will likelyaccount for 85 percent of that state' senergy taxes . And in Tennessee andWashington state, the industrial andtransportation sectors will yield overtwo-thirds of the new revenues .

But the residential and commercia lsectors are not immune. For example ,those sectors will account for almost hal fthe Btu tax burden in Florida and wel lover half the burden in Ne wYork state .

The Tax Foundation also producedfigures showing how the energy tax wil laffect the average household an dindividual in each of the 50 states . Of thehouseholds across the country, those i nAlaska are far and away the hardest hi tby the new tax (see the chart on page 1) .The average household in Alaska will pay$844 .40 in energy taxes in 1996 .Households in Wyoming and Louisian awill bear the second and third largestburdens, paying an estimated $646 .5 0and $639.50, respectively, in additionaltaxes . Texas ($442 .80) and North Dakota($349.20) round out the top five . Theaverage Btu tax burden in 1996 fo rhouseholds across the nation is esti-mated at $266 .50 .

Dr . Hall predicts those living inAlaska will also pay the most in 1996 o na per capita basis-$280 per person .Residents of Wyoming and Louisiana willagain be the second and third hardes thit,with the new energy tax adding$237.50 and $225.50, respectively, tothe per capita tax bill in those states . Forthe nation as a whole, the 1996 Btu taxper person will run $97. •

3

The uneven nature of federal tax

payments among the fifty states is

highlighted in Economist Chris R.

Edwards' latest Special Report, "The 199 3Federal Tax Burden by State ." Some

states' residents pay over $6,000 pe rcapita to the federal Treasury each year ,while others pay less than $3,000 .

On the flip side, different statesreceive different levels of federal spend-ing on everything from defense contract s

to Social Security payments to residents .A comparison of federal taxes and federa lspending by state will be presented in theJune issue of Tax Features.

Significant variations in federal taxburden occur between the states becauseof differences in income and othe rfactors—including variations in consump-tion rates of federally taxed goods lik egasoline .

By far the largest payment to thefederal Treasury is made by residents o fCalifornia, who will shoulder $148billion, or 13 .2 percent of all federal taxe sin fiscal 1993 . It would take the taxe sattributable to all of the bottom-ranked 2 5states and the District of Columbia toequal the amount of tax revenue gener-

ated from this single state . In contrast ,Wyoming's $1 .9 billion tax bill amount sto only 0 .2 percent of the total .

A different picture emerges whentaxes paid by each state are considere don a per capita basis . Connecticutresidents have the highest per capitafederal tax burden in the nation at$6,647 . New Jersey residents are not farbehind and face a per capita federal taxburden of $6,302 .

At the other end of the scale, anumber of mostly western and southernstates have the lowest levels of per capitafederal taxation . With a per capita taxburden of $2,703, Mississippi is the onlyremaining state where residents payunder $3,000, on average, to the federalTreasury . Mississippi is joined by Wes tVirginia, Utah, New Mexico, and Arkan-sas to round out the five states that werelowest in per capita federal taxes . Thegap between the highest-ranked state(Connecticut) and lowest-ranked (Missis-

sippi) is close to $4,000 per person .Over the past decade, Connecticut

ranked as either the first or secondhighest-taxed state each year, whileMississippi managed to hold its place as

the lowest-taxed state throughout theperiod . Some states, however, hav emoved substantially in the rankings .Texas, which had the 18th highest ta xburden per capita in fiscal 1984, will fal lto 32nd by fiscal 1994 . North Dakota ,originally ranking 23rd, will move downto 37th in the nation by fiscal 1994 . Theresidents of I-Iawaii have moved in theopposite direction, from 24th in fisca l1984 to 10th highest currently .

The accompanying chart shows th e10-year change in federal taxes per capitain constant dollar terms . Federal taxesper capita for the country increased 2 3percent over the decade . Differentialchanges in the tax burdens of each stateprimarily reflect changes in each state' seconomy and residents' incomes .

Only three states, Alaska, Oklahoma ,and Wyoming, saw their real federal per-capita tax burden fall over the period . Acommon factor for these states, as well a s

for Texas and Louisiana— states whic h

also did not see increases in real federa ltax burden—is the importance of the oi land gas industry to the states' economies .

In contrast, high-income states in theEast, including New Jersey, Connecticut ,Delaware, New York, Massachusetts, and

New Hampshire, all saw their real per

capita federal tax burdens increase b yover 35 percent during the decade . •

FY93 Federal Tax Burde nPer Capita

Top and Bottom Ten States($Millions)

State Amount Rank

Connecticut $6,647 1New Jersey $6,302 2Alaska $5,502 3Delaware $5,463 4Massachusetts $5,316 5New York $5,290 6Maryland $5,120 7Illinois $5,018 8Hawaii $4,880 9New Hampshire $4,757 1 0

Alabama $3,348 4 1Louisiana $3,325 4 2Kentucky $3,316 4 3South Carolina $3,288 4 4Idaho $3,249 4 5Arkansas $3,189 4 6New Mexico $3,153 4 7Utah $3,080 4 8West Virginia $3,078 4 9Mississippi $2,703 50

Source: 7(1.1 1'011)1(((1!1)11 .

Federal Tax Burden Per Capita(Fiscal Years 1984 - 1994 )

'83

'84

'85

'86

'87

'88

'89

'90

'9 1

S'olnce: Tar Foundation; U.S. Bureau of Census .

'92

'93 '94e

5000

4000

3000

2000

1000

0

4

help provide the direction and feed-back required to make informed,progressive decisions designed to workfor all of us .

Business and community leadershave identified education, health care ,government restructuring, and theenvironment as top priorities for th e1993 legislative session.

State developments will likelyfollow these lines, but will also dependon new initiatives pending at thefederal level .

This morning, however, in order tofocus our discussion, I would like totalk to you about a fiscal battle I havebeen fighting since last September ,before the legislature even convened—the South Carolina budget . If you'vefollowed the press over the last coupl eof months, you have undoubtedly readabout the loss of South Carolina' sTriple-A credit rating .

Friends, this is more than acosmetic label . It is a final blow to ayear of budgetary mayhem. For the firsttime in 30 years, our credit rating hasbeen downgraded, and it is all of u staxpayers who will be forced to foo tthe bill! The only Triple-A we have nowis the American Automobile Associa-tion, and—whether through behind-the-back tax increases or reducedservices—the taxpayers of SouthCarolina are getting the shaft .

One of Standard & Poor's reasonsfor lowering our credit rating was tha tthe state's efforts at budget reformhaven't gone far enough since March of1992 when the South Carolina govern-ment was placed on alert .

Budget reform in South Carolina isa number one priority for our state, forif we cannot manage properly our fisca laffairs in the present, South Carolinawill be left standing in a financialbackwater in the future .

As I addressed the openingsession of the General Assembly inJanuary: Before the state governmen tcan responsibly spend taxpayers 'money, it needs to know where themoney is going .

Last year, I single-handedly vetoed

Lieutenant Governor Nick A.

Lieutenant Governor TheodoreTheodore

presented the keynote address at th e(D-South Carolina)

Tax Foundation's fiscal policy semi-nar in Columbia, SC, in April. Th efollowing was excerpted from hisremarks.

Grass roots efforts are alive andwell in the united States, and evenmore active right here in South Caro-lina, thanks to your participation an dthe work of the South Carolina PolicyCouncil and the Tax Foundation .

The public and private sectorsmust ensure a cooperative spirit t o

Budget reform in South Carolinais a number one priority for our state, fo rif we cannot manage properly our fisca l

affairs in the present, South Carolinawill be left standing in a financia l

backwater in the future.

improve the operations of governmentso that South Carolina remains competi-tive and viable nationally, as well asinternationally . And even more impor-tant, so that South Carolina citizen senjoy an enhanced quality of life .

Groups like yours are one of themost dynamic elements of the Ameri-can political system, and through you rhelp and involvement at every sector ofthe community we can ensure thatelected representatives are indee drepresentative—and more importantly,that we are representing the issuesimportant to you .

The 1993 legislative sessionpromises to be an historic one, pro-vided we continue the momentumtoward making South Carolina govern-ment more efficient and more effective .

And, as part of this momentum ,state government needs your input to

FRONT &CENTER

5

South Carolinalags far behind

the rest ofthe nation

in allowing theprivate sector

to performcertain services.

over $40 million in additional behind-the-back taxes, making many legislator sfurious, but protecting the pockets of al lof us, the taxpayers .

Last fall, after the Budget and ControlBoard's budget fiasco, I thought long andhard about changes we need right here inSouth Carolina, particularly with regard sto how state government conducts it sfiscal management .

The Supreme Court of South Carolinaagreed unanimously with this position ,and in November I published "SouthCarolina's Budget Process : In Need ofRepair ." I have outlined several item swhich should prove helpful in steerin gthe discussion of how to ensure greate rbenefit from scarce and hard-earned taxdollars .

First, the 1993 assembly mustprioritize our funding in order to deliverto South Carolina's citizens the service sthey most desire.

My report, the only one of its kind ,outlines in detail a method of priori-tization in which we decide whether th eeducation of your children and you rgrandchildren is more important thanusing state aircraft to fly your electedofficials around .

We simply do not have enoughmoney to satisfy everyone's wish list, and

it's time somebody stepped up to theplate and said . "No! You cannot have anymore of our tax dollars! "

Second, we need mission statement sfor our agencies to show us where weought to be going, and benchmarks tomeasure our success or failure in achiev-ing these goals .

The overall premise of my plan is tha tstate government and state agencies mustlearn to do more with less, and leadershi pmust be exerted in determining wher escarce resources must be spent in orderto meet more comprehensively the need sof South Carolina's citizens .

Would you believe that almost 95percent of the state budget funds servicesthat have not been examined in years?Currently, we are shooting in the darkwhen we fund agencies . We simplycannot afford to slash valuable educa-tional, medical, and human services anyfurther without shortchanging the long-term future of South Carolina .

Third, the legislature needs to giveagencies incentives to save state money .Under the present approach of "use-it-or-lose-it" spending, total agency equipmentexpenditures rise an astonishing six time sabove their monthly average at the end o feach fiscal year .

If we allow agencies to carry forward

a greater portion of what they save, th estate benefits because the agency wil lneed that much less money in theupcoming years .

Fourth, South Carolina lags far behin dthe rest of the nation in allowing th eprivate sector to perform certain services .If state government can provide theseservices more effectively and efficiently ,then fine . If not, then we need to seek outthe experts who can perform thes eservices more cost-effectively for you an dfor me, the taxpayers .

As a final point, the Legislative Audi tCouncil and others have pointed outsteps for immediate cost savings : unusedstate land to sell, reducing subsidies toout-of-state students, limiting spendingallowances for many of your stateofficials, just to name a few . We need toexamine the advice of the Audit Council ,and work quickly to implement some o fits suggestions for a more cost-effectivegovernment that governs well .

The time has passed for any morestudies . We've already done our home -work, and the handwriting is on thewall . Armed with this ammunition, 1993must be the year for action, and not asession of dialogue . Simply stated, thebuck stops here . So I urge you to keepme informed. •

6

On March 19, the Tax Foundationsigned a cooperative protocol withKazakhstani officials which laid thegroundwork for greater cooperatio nbetween the former Soviet republic andAmerican and European businesses . Theprotocol, signed by Kazakhstan' sMinister of Finance and chief of the

Central Tax Inspectorate, contain s

major statements of principle tha tbusiness leaders feel are needed tocreate a tax climate more favorable t oforeign investment . It also highlightsareas in which Kazakh officials nee dWestern assistance, such as education,computerization, and economic policydevelopment .

In Moscow a week later, theFoundation signed a memorandu mof understanding with officials from th eMinistry of Finance, and another withmembers of the Supreme Soviet . Thememoranda outlined a set of guidelinesfor future cooperation and for law s

governing the taxation of foreign

investment in Russia .The Kazakhstan visit is considered

the first formal meeting on tax an dtrade policy between American an dEuropean executives and Kazakhstan iofficials . The central Asian country i srich in natural resources, particularl yoil and natural gas, and has attracte dmuch attention from businesses in theWest . However, Kazakhstan's curren tsystem of taxation poses seriou shurdles to firms considering makingan investment.

Asa follow-up to the March trip ,

the Tax Foundation invited keyKazakhstani tax and finance officials toWashington, D .C., in mid-May toparticipate in a full-day conference, "Ta xand Legal Aspects of Foreign Investmen tin Kazakhstan ." Leading the delegation :Minister of Finance EX llerbisov .

The Russian leg of the trip was the

fourth meeting between the Ta x

Foundation and top Russian officials.Earlier in March, some of Russia's to pofficials—including the Acting Chair-man of the State Tax Service—werefeatured at a 'fax Foundation-sponsoredconference that examined obstacles toforeign investment in Russia . •

In March, the Tax Foundation sighed two memoranda of understanding with topRussian officials. Seated, from left.• Clyde Tyree Crook, Baker Hughes; Dan Witt, TaxFoundation; V. V. Gusev, Acting Chairman of Russian State Tax Service; and LindaSenal, British Gas PLC. Standing, from left: David Tomney, Citicorp/Citibank, USA ;Dr. Charles McLure, Jr., Hoover Institution; Jack Barbanel, The East-West Trade andCommerce Group, Inc. ; and Marlen Lawson, Bechtel Group, Inc .

Members of the Tax Foundation delegation confer with Kazakhstani officialsbefore signing protocol. From left.• F./. . Derbisov, Minister of Finance; M.T. Ospanov,Chief of the Central Tax Inspectorate; Gennady Bekhterer, interpreter, Bill Frenzel,delegation leader and Tax Foundation Distinguished Fellow; Dan Will, TaxFoundation; and Charles McLure, Jr., Senior Fellow at the Hoover Institution .

UPDATE

The Tax Foundation launched itsthird annual series of state seminars on taxand fiscal policy in April, with a semina rin Columbia, S .C ., April 6 and another inBoston, Mass ., April 20 .

Featured speakers at the SouthCarolina seminar included Iieutenan tGovernor Nick A. Theodore ; Secretary ofState Jim Miles ; State Senators John E.Courson and John Drummon ; and LutherF. Carter, Executive Director of the S . C .Budget and Control Board .

The seminar in Massachusett sfeatured Lieutenant Governor Argeo Pau lCellucci ; Rep. Thomas Finneran, Chair-man of the General Court's Ways andMeans Committee ; and Mark Robinson ,Secretary of Administration and Financefor the state . Also, Herman B . "Dutch "Leonard, Baker Professor of Public SectorFinancial Management at Harvard's Joh nF. Kennedy School of Government ,presented the keynote address .

Dr . J .D . Foster, Chief Economist,traveled to New Orleans May 3-4 to takepart in the Wall Street Tax Association' sAnnual Seminar . I)r . Foster joined th epanel titled "1993 and 1994 Tax Legisla-tive Outlook ." Other participants on th epanel included moderator Anthony Cetta ,First Boston Corporation ; Fred Goldberg ,former Assistant Secretary, TreasuryDepartment ; and James Miller, former 'laxLegislative Council, TreasuryDepartment .

The Tax Foundation was well rep -resented at a tax conference for journal-ists at the University of Cincinnati inApril . The event was part of this year sGeorge L . Strike Journalism Program .

Floyd Williams III, Chief Tax Counsel ,spoke on the outlook for enactment o fPresident Clinton's tax proposals and th elikelihood of comprehensive tax reform i nthe future . Dr. Patrick Wilkie, AssistantProfessor of Taxation at George MasonUniversity and a 'Fax Foundation Visitin gProfessor, gave an address on the issue oftax fairness. Finally, Gene Wells, VicePresident of Taxes at Procter & Gambl eand a member of the Tax Foundation' sProgram Committee, spoke on the issu eof U .S . international taxation and how U .S .tax policy can create burdens for it smultinational corporations . •

FOUNDATIONMESSAGE

I've discussed in this space before the journey of the former Sovie trepublics from totalitarianism toward a pluralistic democracy and marke teconomy . Obviously, the opening of these markets has created enormousnew opportunities for American businesses and American trade in general .

But taking full advantage of these opportunities will require the politica lleaders of those countries to establish new relationships between consumers ,domestic and foreign businesses, and government agencies . The Tax Founda-tion has been in an excellent position to assist in this process . Since Decem-ber 1991, we've brought together senior American financial and tax execu-

tives with senior Russian government official sfour times to discuss the tax aspects of improvin gRussia's investment climate . In March of this year,we sponsored a visit by top Russian tax andfinance officials to Washington, D .C., whichallowed them to participate in a week-long serie sof meetings examining investment in Russia .

Three weeks later, we led a delegation backto Moscow to sign two memoranda of under -standing with officials in the executive an dlegislative branches of Russia's government secrelated story, page 61 . The documents called fo rongoing and regular information exchange ,training, and education .

On that same trip, we signed a protocol withkey government officials in the Republic of Kazakhstan . We believe this was afirst for the U .S . private sector . We then invited those officials to this countryin May, to participate in a conference titled "Tax and Legal Aspects of ForeignInvestment in Kazakhstan . "

The relationships we have developed during this process have provide dthe Tax Foundation a unique opportunity to assist the Russian and Kazakhsta ngovernments in developing tax systems conducive to economic growth an dthe foreign investment essential to that growth . It has also facilitated t J .S .investment in both countries, offering American workers the possibility o fexpanded job opportunities through increased exports to these countries .

These and several proposed activities in Russia are natural applications o fthe Tax Foundation's mission . Through them, we hope to help establis hinstitutions abroad that will encourage free market practices and promot eeconomic growth—to the benefit of Russian, Kazakhstani, and Americanbusinesses, consumers, and workers, at virtually no cost to the America ntaxpayer .

Of course, there is always the chance that political circumstancesoverseas will intervene to damage our prospects for real tax and financ ereform in the former Soviet Union. But we are willing to bet it won't . TheRussians and Kazakhstanis—as well as citizens of other developing econo-mies—rely on foreign investment to provide much-needed capital an dtechnological assistance . The most astute officials know they won't get asteady flow of trade and investment unless they can provide a stable tax an deconomic climate .

This doesn't just apply to Russia and Kazakhstan. It's a principle webelieve U .S . politicians should also take to heart .

Duu WittExecutive Director

TAX FEATURES

Tax Features (IS.S'N 0883 -1335) is published by th eTax Foundation, anindependent 501(c)(3)organization chartered inthe District ofColumbia .Original material is no tcopyrighted and may bereproduced. Please credi tlax Foundation .

Co-ChairmanJames Q . Riorda n

CO-Chairma nJames C . Miller, II I

Eyecutn e Directo rDan Wil t

Cbief Economist& Director-

J .D . Foster

Distinguished FellowBill Frenze l

Chief Tax CounselFloyd I. . Williams

Senior Economis tArthur P . Hall, I I

EconomistChris R . Edwards

Sr. Research Fello wB . Anthony Billings

Sr. Research Fello wTracy A. Kay e

Ernst & YoungVisiting Professo rPatrick J . Wilki e

Arthur Anderse nVisiting Professo r► oosung .lun

Edito rStephen Gol d

Productio nl'accino-Gray Design, Inc .

Tax Foundatio n(202) 783-2760

The 'Fax Foundation's Chief Economist andDirector, Dr . J .D . Foster, testified before theSenate Finance Committee April 30 on th eClinton administration's tax program and theproposals to increase the personal and corporateincome tax rates in particular .

It was the second time in a month that th eTax Foundation had been invited to presen ttestimony before a tax-writing committee i nCongress . 1)r. Foster appeared before the Hous e

Chief Economist JD. Foster appears before th eFinance Committee of the United States Senate .

Ways and Means Committee to discuss PresidentClinton's tax plan on April 1 .

In his statement to the Finance Committee,I)r. Foster reminded members that there weregood reasons for reducing tax rates in the 198 1and 1986 'lax Acts, reasons as valid today as the ywere then, and that the Committee had played apivotal role in writing these laws .

"The basic laws of economics governinghow individuals respond to incentives have no tbeen repealed," he stated . "The reasons forkeeping tax rates as low as practicable have notchanged in seven years. What has changed is thefocus of our attention . "

Ile advised that raising the tax rates onupper-income individuals would merely serve asa disincentive to save and to invest . By raisin grates, the government discourages "thos eindividuals who are most capable of makingdiscretionary saving decisions, and who, in fact ,do most of the saving at the individual level .Make no mistake—private saving will decline i ftax rates rise . "

Dr. Foster told Committee members that th eU .S . faces a fundamental economic problem : lowproductivity growth. "A deficit-reductionprogram such as the one proposed by theClinton administration, which relies on large ta xincreases, defense spending cuts, and a reshuf-fling of domestic spending programs, does no toffer any hope of addressing the decline i nAmerican productivity," he said. "In fact, it wil lprobably do more harm than good . "

"The [proposed] program is likely to reduceboth the rate of saving per dollar of income, andthe rate of economic expansion, thereby assuringa reduction in private saving which may excee dthe amount of actual deficit reduction ." •

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