Last month, I discussed the need to view community development as a public good because development involves crucial governance areas, from education to infrastructure, that benefit all of society. And in order to build sustainable communities, these services should be financed through broad-based taxes, instead of user fees, public-private partnerships and other revenue schemes. This month, I would like to present a contentious argument for the financing of sustainable community development. The argument holds that we need to return to basic tax practices, implement a consumption-based tax at the national level for needed revenue and construct programs in such a way that communities have needed resources along the autonomy to be creative.
Governments at All Levels Need to Return to Broad-Based Taxes.
Broad-based taxes are traditional revenue generators, such as the progressive income tax, consumption taxes and property taxes. These taxes distribute cost throughout society, instead of concentrating it on just a few, like with user fees. For example, take higher education, paying for the service with a combination of sales tax and income tax revenue distributes cost across the entire state (and beyond). On the other hand, paying for the service with user fees, mostly tuition, concentrates cost on students and their families. This places a large burden on a few. The governance problem is that everybody benefits from the service, but a few are experiencing most of the pain. Many community development services should be paid for through broad-based taxes because they benefit us.
Accordingly, broad-based taxes are based on the principle that everybody benefits from public goods. Given this, why did we turn away from these types of taxes? The answer is easy: politics. It is easier for elected officials to say “no new taxes” to a very anti-tax public than to make the argument, best stated by Justice Oliver Wendell Holmes, that taxes are the price we all pay for civilization. Our elected officials and citizens need to stop fearing short-term, incremental tax increases and start fearing the dangers of our current trends of underfunding and defunding key public services.
It is Time for a National Value-Added Tax
To build sustainable communities, our political system needs tax reform that is not revenue neutral. This can be done with the least pain and the greatest gain through the implementation of a national value-added tax (VAT).
What is a value-added tax (VAT)? A VAT is a consumption-based tax. But unlike traditional sales taxes, a VAT collects payment of the tax throughout most of the production line. This collection process allows for a higher statutory rate than with traditional sales taxes because with a VAT the tax is spread along numerous steps. Some European nations have rates over 20 percent. Since it is such an efficient, broad-based revenue generator, a value-added tax at the national level would lessen the fiscal stress on our governments, reduce the deficit, and provide more funding for community development and other priorities.
It should be noted that a national VAT has two main problems, and like most policy issues, one is political and one is technical. First, politics and gridlock would make it almost impossible for Congress to adopt such a plan. In 2010 the Senate, by a large majority, voted against even discussing a national VAT. Reasoned arguments applying to both sides may change this sentiment in the future when citizens demand vital services that are disappearing due to revenue constraints. And today, the tax is attractive to both conservatives and liberals. For example, Bruce Barlett, a former Treasury under Reagan, has argued for the tax. While liberal economist Paul Krugman supports a modest VAT, even though he has worried about the regressive tendencies, and liberal Washington Post columnist David Ignatius has pointed to a VAT as a solution to the federal debt. Perhaps, a compromise, where the corporate income tax is replaced with a VAT, may spark political action or at least meaningful decision. The corporate income tax is inefficient and filled with loopholes causing the government to lose large amounts of revenue each year. Replacing this bad tax with a VAT could be good politics and it certainly is sound policy. Second, a national VAT would have to be imposed on top of the sales tax systems of our state and local governments. This is a serious technical issue. However, we can look to our northern neighbors for help. Twenty-three years ago Canada instituted a national VAT over the current sales taxes in its provinces.
Strengthen Community Development Block Grants for a New Era
A portion of the funding should be earmarked for states and localities to finance general community development programs. Our communities need the fiscal resources of the national government, but to develop innovative solutions, they also need local autonomy. The solution: more federal funds, through a VAT, to our communities for a wide-range of development actions. The money should be funneled through a reformed Community Development Block Grant (CDBG) program. The program has always allowed for local flexibility. The program should be reformed to give even more local autonomy to communities. However, the program needs funding from new sources, such as the VAT. The CDBG program, being a nondefense discretionary item, has not fared well in recent budget battles. A CDBG program, based on targeted revenue from a national VAT, would give state and localities more freedom to implement creative development solutions.
I view this column’s argument as a polemic. I borrow the use of the word from Charles Goodsell’s seminal case for bureaucracy. Even though the three basic ideas were once relatively moderate, today, making the case from them is akin to making a case for the virtues of bureaucracy. Public goods advocates need to make this and other controversial arguments against the flawed view that government is not needed and that key public services can be financed with user fees and privatization. Convincing the public of the virtues of government and the need to finance it properly is the one of the most pressing issues facing community development practitioners and scholars today.
Author: William Hatcher, Ph.D. is an assistant professor in the department of government at Eastern Kentucky University. He can be contacted via William.Hatcher@eku.edu. (His opinions are his own and do not necessarily represent those of his employer.)