Monday, May 23, 2005

The word you're looking for is "surtax" 

Dear Governor Pawlenty,

Chad points out that the STrib believes it is a tax. Your new buddy Mitch is writing letters to you. David is polishing his rapier, and PolicyGuy is pointing out that the DFL is trying to repackage its gas tax as a "wholesale fee". You've heard from several sides now that you may have stepped in the lutefisk. So what's a guy to do?

Well, we didn't have a chance to discuss this at our meeting, but I've been known to give advice to a few other governments, and I'm here to provide you some help. The first thing we need to do is keep your eyes on what is important, and what is important is not the size of the deficit, but the size of government. The problem with ever proposing to put up taxes is that it requires, if you're a fiscal conservative, having enough votes later down to take them down. The problem with cigarette taxes is that once they are put up, there isn't a constituency clamoring to take them down, because smokers are a minority. If you raise cigarette taxes, then, you've made sure that government gets permanently bigger. That is not just a "bad thing", that is the baddest thing when you are a fiscal conservative.

So first thing to do, today, is to say that the cigarette tax increase -- and for goodness sake, quit splitting hairs on semantics, lest we give the STrib another good editorial line -- is only good for two years. Sunset it. You can even use the label surtax, which would now make sense. Make the next Legislature propose to keep the increase, and then veto that increase when it comes in. The left will howl, but they weren't about to vote for you because you were nice this time. The right might find it in their heart to forgive a backing away from your pledge, though, and a good veto fight over cigarette taxes two years hence will be red meat for the faithful.

Second, enforce the conditionality of your offer. You asked for four things, two of which must be passed for you to sign onto the cigarette tax increase. Be damn sure you get these. It looks to many of us like you folded your hand then asked for a quarter of the pot for being nice. Show us this isn't true, that there was a quid for the quo. To do this, you must leverage your power to call the special session by insisting that all the parts of the deal you offered must be in place before you'll sign the order for the legislature to come back. Get it in writing, don't trust the Senate on this (ask Cheri Yecke if you need advice borne of experience.)

Last, get one of those stickers that the Center for the American Experiment's FACT group was handing out after Guiliani's talk Thursday night, which read It's The Spending, Stupid, and put it on your car. I'll repeat the first point: It's not the size of the deficit, it's the size of government. As Milton Friedman said a couple of years ago:
Many discussions of the economic effect of tax cuts and deficits implicitly assume that government spending is predetermined and independent of whether there is a tax cut or a deficit. In that world, deficits are produced entirely by a shortage of tax receipts. Raising taxes can eliminate the deficit without affecting spending. As I see the world, the situation is very different. What is predetermined is not spending but the politically tolerable deficit. Raise taxes by enough to eliminate the existing deficit and spending will go up to restore the tolerable deficit. Tax cuts may initially raise the deficit above the politically tolerable deficit, but their longer-term effect will be to restrain spending.
If you raise taxes, the Legislature -- including your friends in the Republican party -- will increase spending to create another deficit that you will be pressured into funding two years from now. Do not get yourself in that box. To paraphrase a quote about inflation I heard given by a governor of the Bundesbank, do not flirt with taxes, because if you do you'll end up marrying them, and divorce is quite expensive.