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Taxes: What Constitutes An Increase?

By Dr. Michael Walden

Few topics spark as much controversy as taxes, and especially an increase in taxes. But what really constitutes a tax increase? Or, in other words, are all tax increases created equal?

To some the answer is easy: A tax increase happens whenever taxes paid rise. By this way of thinking, if Joe Smith paid $1,000 in taxes last year and this year he pays $1,200, a tax increase has occurred. End of story.

But what if we’re talking about the income tax, and what if Joe’s tax payment rose only because his income rose? Should this still be considered a tax increase, especially if the percentage of each of Joe’s dollars taken in taxes has remained the same?

It’s time for a little terminology to more clearly see the issue. Taxes paid result from multiplying whatever is taxed (called the tax base) by the percentage of that tax base taken in taxes (called the tax rate). For example, how much sales tax you pay equals the dollar amount of your retail spending multiplied by the sales tax rate (cents of sales tax per dollar of spending).

So, an increase in taxes paid can occur for three reasons: the same defined tax base rises, the tax base is defined to be larger, or the tax rate is increased. The question is, which should be considered a true tax increase?

A case can be made that the first example doesn’t constitute a tax increase, but the latter two do. If you pay more sales tax only because you spent more at retail stores, logic would say this isn’t a tax increase. But if the state expanded the sales tax base to include spending on services and didn’t lower the tax rate, or if the state simply increased the sales tax rate, a legitimate tax increase has occurred.

Most taxpayers understand these differences with one exception — the property tax. Like all taxes, property taxes paid equal the property tax base (here the value of property recorded by the county, called assessed value) multiplied by the property tax rate (cents of tax per dollar of assessed value). (more…)