Temporary Tax Hikes and Other Fairy Tales

The mayor of Philadelphia, Michael Nutter, is proposing a temporary increase to the city’s property and sales taxes and a “fill-up” to the city budget.

“The sales tax would rise by one percentage point to 8 percent for three years, beginning July 1, pending approval by state lawmakers. Taxes on residential and commercial real estate would rise by 19 percent in the coming year, and by 14.5 percent from current levels in the 2011 fiscal year, Mr. Nutter said.

The new tax rates, which Mr. Nutter’s budget projects would raise $614 million over their planned life, would be rolled back to current levels when they expired, based on the assumption of an economic recovery.”

Now, Mayor Nutter is not unique.  Temporary tax increases are being contemplated, if not implemented, in Illinois, among other places.  Others are contemplating permanent tax hikes.  The matter with Mayor Nutter is that, firstly, Philadelphia, like many urban centers, isn’t exactly healthy to begin with, economically speaking — professionals such as accounting firms and lawyers maintain “jewel box” offices in the city, where introductions and sales pitches are done, while the bulk of their operations lay beyond the city limits, safe from the city’s income, property and other levies — raising taxes makes other locations more attractive for city companies.

But the greater fiction is the whole notion of a temporary tax hike.  Temporary tax hikes are usually anything but — for all the “live within our means” rhetoric oozing out of state capitols and Washington DC, no reduction in governmental spending is in the offing.

A cautionary tale…

Once upon a time, to pay for a foreign entanglement, a “temporary” luxury tax was levied upon a new-fangled luxury technology, then deemed a plaything of the wealthy.  This “temporary” excise tax, over the years, slowly became a part of the landscape, chugging along, increasing the cost of this former luxury good by 3%, year in and year out.  This tax, in fact, had to be voted down twice.  Before it was finally beaten down and staked, some enterprising souls thought this “temporary” tax should be expanded to cover unrelated technologies.

Passed in 1898 to pay for the Spanish American war, this tax was on telephones.  Kept in place for over a century, it eventually came to encompass most of the population and likely fulfilled its purpose several times over.  And, yes, it was a *temporary* tax:

“In 1898, the House Committee on Ways and Means wrote of the Revenue to Meet War Expenditures Act, which originally enacted the 3% tax that, “all of these additional taxes are war taxes, which would be naturally repealed or modified when the necessitates of war and the payment of war expenses have ceased.”