The Targeted Tax

Author’s Note: The following first appeared on the Democratic Leadership Council’s new Ideas Primary website. I encourage all in the Democratic Party who care about solving problems and who understand the importance of holding the progressive Democratic Center to win the general election in 2008 to check out this new site that the DLC has established to generate new ideas for governing America and solving its major problems — rather than continuing the hyper-partisan food fights for another cycle.

Most taxes levied on Americans go into the general fund — meaning the income taxes and general corporate taxes, for example, paid by individuals and corporations go into a single pot, which is then divvied up among items in the federal budget.

We ought instead to raise money using a paradigm called the “targeted tax.” Another way of saying this is to call it a dedicated or “earmarked” tax. However, instead of borrowing to spend on pork-like bridges that lead to nowhere, the tax revenues must, by statute, only be used for the designated purpose. One practical way to ensure this is to create special “trust funds” into which revenues from that tax must be deposited. These would have statutory prohibitions (carrying criminal penalties applicable to federal appointees in the department to which the funds are assigned) against spending those funds on anything other than the targeted purpose. An extra-majority — such as a two-thirds or four-fifths majority vote by both houses of Congress — would be required before anyone could spend the targeted tax revenues on anything other than what is specifically designated under the law.

The idea of a “targeted tax” is not new, but the expansion of the concept to fund new government programs and investments is. Since President Eisenhower, the Highway Trust Fund has received billions of dollars of gasoline tax revenues that for most of its history could only be used to construct the interstate highway system. Only in recent years, overcoming intense opposition from the highway lobby, have some of the Highway Trust Fund revenues been made available for mass and public transportation investments.

Polling data is amazingly decisive on this issue. When people are asked the general question of whether they support increased taxes to fund government programs, majorities usually say no. Yet, when the same sample is asked whether they would support a targeted tax to pay for specific programs, such as new school construction or higher teacher salaries, the numbers dramatically switch. Majorities are willing to pay the new tax if revenues from it can only be used for the designated purpose.

In recent weeks, Maryland Democratic Gov. Martin O’Malley has proposed a comprehensive package of spending cuts, tax cuts and tax increases to close a structural deficit that he inherited from the prior Republican Gov. Robert Ehrlich exceeding $1.7 billion. One important part of his package includes a classic example of a “targeted” tax — splitting a 1 percent increase in the corporate income tax between higher education subsidies to hold down student tuition and transportation and infrastructure investments. In addition, O’Malley has proposed increases in various other taxes, such as increasing the vehicle titling tax 1 percent and indexing the state gas tax, which would be dedicated only for critical transportation needs. Whether or not the Maryland legislature will add supra-majority requirements to prevent future raiding of these dedicated funds for non-education or non-transportation purposes remains to be seen.

Once the American people trust that these targeted tax revenues cannot be raided by law, then support for new types of taxes should dramatically increase. These could include a targeted, special “value added” or national sales tax (made progressive through lower-income rebates), as well as special income tax surcharges weighted toward wealthier taxpayers.

Here are four potential targeted-tax “trust funds” that reflect the priorities of most Americans.

— An Education Trust Fund could be specifically targeted to build new schools, fund higher teacher salaries, expand “Head Start” tutorial attention for the poor and the underprivileged, and provide tax breaks for the middle class for college tuition.

— A Health Care Trust Fund could guarantee minimal access to insurance and health care for all Americans, with focus on those at the lowest end of the economic ladder. It would also use tax and other market incentives to reward private medicine for cutting medical care costs.

— Mass Transit and Environmental Trust Funds could focus on transportation and environmental infrastructure. It could be used to rebuild our decaying bridges and highways, to expand mass transit and public transportation alternatives, and to subsidize investments in technology to ensure cleaner air and water.

— An Energy Independence Trust Fund could be for developing clean energy alternatives to achieve independence from foreign oil, including synfuels (using new synthetic fuel technologies to convert coal into gasoline, diesel, jet fuel, and other petroleum products, as Montana Gov. Brian Schweitzer has argued is now both economic and practical at today’s price of oil), safer and environmentally clean nuclear energy, electric-powered cars, as well as solar, wind, and water power technologies. As Tom Friedman has written, unless America can be weaned from dependence on foreign oil, this country will not be able to regain its economic and political independence that has been so compromised.

Of course, there are other priorities and public investments that can be paid for by new targeted taxes, such as restructuring Social Security, a massive “Marshall Plan” to retrain workers whose jobs are threatened by outsourcing and unfair competition in developing countries, and a national service corps in which all high school graduates are required to perform some form of national service for one to two years after graduation.

Once the targeted tax is accepted as the governing revenue-raising principle, there is a greater chance for selling tax increases in the future to fund new programs such as these, as well as the ability to address the new problems that are bound to arise.