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As Long as We Remember...

November 8, 2011

Change for The Better?

Farrell Keough

It is a commonly held proposition that if you want less of a thing, tax it. While this often works in practice, there are historic instances when taxation was necessary to cover extraordinary costs.


Early in our nation’s history, various taxes were placed on any number of articles – sometimes as “sin taxes” on liquor or tobacco, but other times on necessary items like food stuffs and imports. Without a mechanism for the national government to obtain the necessary funds to fight its wars, it was dependent upon the states to cover these costs. These were generally handled through targeted taxes with a specific purpose; hence, they did not exist once this expenditure was paid.


Of course, once the 16th Amendment was enacted in 1913, all bets were off – but I digress.


So, what is the point? We all realize that taxes are a necessary evil – we all need roads, law enforcement, schools, etc.; but at what point do we need to step back and recognize when enough is enough and our problem is not revenue, but rather over-spending?


In a recent decision, our Board of County Commissioners decided to cut our county’s excise tax to zero. The reason they could not remove it entirely was that there were still funds in the account and legal counsel determined that a complete removal of the tax, (at this point in time) would cause problems with accessing those funds.


Before we determine whether this was a wise or foolish maneuver by the commissioners, let’s first determine just what an excise tax is, and if it is a wise governmental action.


Investopedia has a general definition which makes excise tax fairly easy to understand. It is:


1. An indirect tax charged on the sale of a particular good.


2. A penalty tax applied to ineligible transactions….


- Ad Valorem: A fixed percentage is charged on a particular good.

- Specific: A fixed dollar amount dependent upon the quantity purchased is charged.


So, as a general proposition, an excise tax is a targeted levy focused on producers. It can span the spectrum from a tax on liquor to an extra charge for accessing your retirement account(s) due to personal problems like health care costs. It is not an across the board tax which applies to all transactions or people equally. In short, it is the government determining that certain actions require an extra penalty. While this mechanism is not new, it does establish the circumstances of not only government picking winners and losers, but more so, it often establishes a situation of double taxation. To understand the double taxation, let’s take a specific example.


In Frederick County there were two basic excise taxes on construction projects: “25 cents per square foot for residential and 75 cents per square foot for commercial.” When we couple this with the existing impact fees, it becomes obvious that this constitutes a double tax on a single undertaking. One should also note the tremendous difference between commercial and residential construction!


Now, what was this Frederick County’s excise tax supposed to cover? Basically, it was for roads. Problem is that it was only for the expansion of roads – not repair or calming methods. And further, much of this revenue went to planning/modeling, or the monies would go to roads 30 miles away. In other words, this extra tax would likely be applied to an area far away from the development that had to pony up the cost!


Another important aspect is that commercial developments like the waste-to-energy plant, Fort Detrick, and the new Social Security Administration building in Urbana are not liable to pay this excise tax – government oriented agencies are exempt.


We have seen that this tax does not, in fact, repair roads or even deal with roads in the vicinity of this new development. In short, it is a money grab that sounds great on television or in the newspapers, but in reality, it does not fulfill what is proposed.


So, where have we seen this excise tax cause harm?


The Walkersville Feed Store needed extra storage. To that end, the owners constructed a 6,000 sq. ft. pole barn. The existing excise tax cost them $4,500 in extra fees! This was a storage facility – not a new sales facility that needed parking and would generate many new automobiles on the roads. Yet, this tax still had to be paid! And realistically, how much road expansion will be achieved with $4,500? This cost was a heavy burden to the Walkersville Feed Store, but added little-to-nothing to help the coffers of Frederick County.


Now that we have seen how this excise tax really works, it is time to decide if in fact the Board of County Commissioners did the right thing by zeroing it out.


What do we need in Frederick – or for that matter, across the nation? Jobs, jobs, and more jobs! While government generally portrays how much money, (tax dollars) they ‘may’ lose when a tax is removed, it is rare to see them portray how much money can be increased when business is promoted by eliminating extra costs.


By ending this extra tax, more commercial businesses will have the incentive to locate in Frederick. This means more tax base as well as more employees paying taxes. This is what really builds a long-term revenue base for local government. In short, rather than garner a one-time payment from a commercial establishment, it is better to promote more businesses with many employees and generate a much larger tax base.


Government requires revenue to finance necessary duties, how one achieves that is the real issue. Often we stay with the status quo because it is comfortable. Now is the time to realize that just because we have always done it that way does not make it right. Consider the logic behind this change and determine for yourself if changing the status quo will yield far better results.


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