Sunday, June 07, 2009

Another Teachable Moment on Taxes

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The goose that laid golden eggs. "It's what's for dinner" thanks to the medieval mindset of our terrific leaders in state government!

Do you remember that special session back in the Spring of 2008 to raise taxes on natural gas production? It raised the tax rate to 5%, about 100 times higher than it had been. That's right folks, it averaged out to roughly a 10,000% tax increase. Prior to that, taxes on natural gas production had been very low in part to encourage drilling companies to invest in our state. That was working. They were coming to our state and making some of us wealthy. And those wealthy people bought stuff from the rest of us and that helped make the rest of us wealthy, or at least securely employed. But all of that money coming in became an attractive target to plunder.

So the state raised the tax rate. At the time many people, like me for example, attempted to warn our rulers that raising the tax rate would hurt growth and wind up costing us money. We could not count on high natural gas prices forever. Because so many business decisions are made "at the margin", a five percent loss of revenue can be a disproportionate deal-killer to a businessman who has a hundred different options he can invest in.

If costs of production are 75% of sales price then a five percent tax actually eliminates 20% of profit. That well just became a lot less attractive as an investment risk. A well that produces lower volumes or is harder to work might have production costs that are 90% of sales price. A five percent tax takes half of all profits and leaves the investor with a return comparable to a CD. That is a well that will be shut down or never drilled.

Well, the numbers are in and the result is painful if predictable. The market for natural gas softened just as taxes on production skyrocketed. Wells shut down across the state and new projects dried up overnight. After raising the tax rates 10,000% we find that the following year tax revenues decreased 10.5%. That's right. The tax rates went up, but the revenues from the taxes went down.

Those numbers can only mean that natural gas production and drilling went down far more than 10.5%. The state not only lost its 5% when the well shut down, but the other 95% of the money was lost to the rest of us. The jobs that would have been created from all of that activity were lost as well. Raising taxes in a softening economy is a recipe for disaster. It is a fact obvious to most but forgotten by those in government. It is forgotten because the thrill of spending other people's money is too strong a narcotic for all but the strongest of character to resist, and we the people have forgotten to put character first when choosing our elected officials.

The tax increase was good politics but bad government. In these immoral times, it is good politics to take money from one narrow group (natural gas producers) and spend it on a larger group. The money went to roads. Principles of good government demand that money taxed from a narrow group be spent on costs associated with that narrow group- in this case a good example would be environmental monitoring and clean up to protect the environment from damage associated with natural gas production efforts. That wasn't done.

The insiders will continue to give us good politics but bad government until we are all reduced to ashes and ruin. They aren't going to change the status quo. If you want it changed, then we are the ones that are going to have to change it.

2 Comments:

Anonymous Anonymous said...

Excellent article Mark and now very timely for the upcoming senatorial election in judging the two candidates who were in the senate at the time this vote was taken. In my view, one's past voting record is the key indicator of ones future voting record as well as the candidates understanding of sound tax and economic policy which are foundational in keeping our freedoms and putting this country back on solid footing.

Archibald Forbes

9:05 AM, January 19, 2010  
Blogger Mark Moore (Moderator) said...

Thank you. I do want to point out that the 10,000% tax increase is an exageration. The actual figure is 1,600%.

4:40 AM, February 20, 2010  

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