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Tax burdens divide country's political parties

Tax burdens divide country's political parties

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Cynics fret that “No man’s life, liberty or property are safe while the legislature is in session,” but economics teachers love it as there are myriad timely basic econ examples that help student understanding.

Two current issues, the looming funding problems for Minnesota’s Medicaid program and a disagreement over a proposed gas tax increase for road improvements, are useful teaching moments.

For the gas tax, the heart of the issue for economists is the distinction between how costs accrue to different groups. One can talk of “private costs” born by households and businesses, “public costs” paid by government and hence by taxpayers and “costs to society as a whole” that include both.

If government builds roads and bridges, it has increased outlays. Taxes must be raised to pay immediate expenses or to amortize bonds sold to fund construction. Higher fuel taxes are a cost to households and businesses. Money spent on the tax is not available to pay for household clothing, housing or recreation; for businesses, it cannot be spent on other higher wages, new equipment or other improvements.

Those costs are only half of the issue. Time idling in traffic jams is a cost to the private sector. For commuters, it is non-monetary, time not available for more enjoyable or productive activities. For businesses, an idling truck represents valuable equipment and a driver generating no revenue.

Ditto for bruised tires that have to be replaced or front ends aligned because of potholes, or extra miles that a trucker puts on when choosing a longer route that skirts bad pavement that forces slower speeds. These are private costs due to inadequate infrastructure.

Better roads cost tax money. Better roads also bring economic benefits, whether monetized or not. What is the balance of these costs and benefits for society as a whole? If the net benefits exceed the costs, raise the tax and build the roads.

The Medicaid situation is more complex. This program offers state-subsidized health care for the poor. One issue is decreased federal funding: At the end of March, the Trump administration announced further cuts of another $24 million at first, but that reaches a third of a billion dollars as we move toward 2023.

Also, the existing 2% tax on health providers that help fund the program lapses this year. It must be extended by lawmakers or the funds need to be found elsewhere. A bill, sponsored by legislators from both parties, would substitute an “assessment” on health care claims presented to insurers. This may have some advantages, but some problems persist.

The Medicaid funding issue is multifaceted. Overall, there is the question of whether society as a whole is better off if most people have access to basic health care. Through politics, citizens have decided to subsidize such programs. The question is how to fund these.

Federal Medicaid funding provides a part, but a significant amount must come from the state. And the Trump administration is trying to shrink Medicaid outlays. One option is increasing sales and income taxes to cover the new outlay. That meets political resistance. Instead, a 2% tax on bills of health care providers was instituted.

As that authorization is ending, legislators from both parties have proposed a substitute “assessment” on claims presented to insurers. Average people can be forgiven if they don’t see how the new one would be substantially different from the old one.

Here we get into the economic concepts of “incidence” and “burden.”

The incidence of a tax is the question of who bears the cost of the tax, which is different from who writes a check to the Department of Revenue. Retailers remit sales taxes, but consumers largely bear the burden, which is itemized on sales slips. Motor fuel taxes and state alcohol taxes are not itemized, but people also understand that once again, the consumer largely bears the cost.

This concept was shown when Congress imposed a special excise tax on “luxury” boats in the early 1990s. Boatbuilding is labor intensive. Rich people can spend their money on things other than new boats. Sales of new yachts plummeted and hundreds of skilled workers were laid off. Market price of used yachts, exempt from the tax, rose. The tax ended up coming out of the hide of manufacturers and their employees. And existing owners and yacht brokers got richer. That is “incidence.”

You can make doctors, clinics and hospitals pay a provider tax. They will complain about it. Yet, over time, it does not necessarily reduce their incomes by that entire amount. Prohibit tacking it on to bills, but even then, markets will adjust so that eventually much of the cost gets passed on. However, in health care, most people don’t pay their bills directly. Private insurance or programs, such as Medicare, pay most. So households may pay a bit more directly and the rest will eventually be buried in insurance premium costs or taxes.

Then there is “burden.” A bump in sales or income tax rates does not change much else in established systems. But an entirely new tax requires a new bureaucracy and new employees and accounting functions by providers.

That the existing tax gets passed on and that the uninsured have to bear the full burden are problems. The latter would not happen if instead the tax were on claims presented to insurance companies. And health insurers are about as popular as oil companies, so passing the nominal bill on to them is popular.

There is a fundamental difference between the two political parties on the value of “public goods,” such as roads and health, and on the economic costs of taxation. This is mirrored at the national level by running trillion dollar federal deficits at a time when the economy is at full employment. This difference between the parties has existed for decades. But it has never been quite as intractable as it seems now.

St. Paul economist and writer Edward Lotterman can be reached at


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