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NATIONAL PROBLEMS, LOCAL SOLUTIONS:

FEDERALISM AT WORK

PART II
TAX REFORM IN THE STATES

WEDNESDAY, APRIL, 14, 1999

HOUSE OF REPRESENTATIVES,
COMMITTEE ON GOVERNMENT REFORM,

Washington, DC. The committee met, pursuant to notice, at 10 a.m., in room 2154, Rayburn House Office Building, Hon. Dan Burton (chairman of the committee) presiding.

Present: Representatives Burton, Gilman, Morella, Ros-Lehtinen, McHugh, Horn, Davis of Virginia, Souder, Hutchinson, Terry, Biggert, Ose, Chenoweth, Waxman, Towns, Norton, Kucinich, and Ford.

Staff present: Kevin Binger, staff director; Barbara Comstock, chief counsel; David Kass, deputy counsel and parliamentarian; John Griffin, senior counsel; James Schumann, counsel; Mark Corolla, director of communications; John Williams, deputy communications director; Carla Martin, chief clerk; Lisa Smith-Arafune, chief deputy clerk; Nicole Petrosino, legislative aide; Phil Schiliro, minority staff director; Phil Barnett, minority chief counsel; Elizabeth Mundinger and David Sadkin, minority counsels; Ellen Rayner, minority chief clerk; and Jean Gosa, minority staff assistant.

Mr. BURTON. Good morning. A quorum being present, the Committee on Government Reform will come to order. I ask unanimous consent that all Members' and witnesses' written opening statements be included in the record, and, without objection, so ordered.

Today's hearing is the second in a series that examines the relationship between State and local governments and the Federal Government. Many of the most innovative and successful public policy reforms enacted in recent years originated at the State and local levels. Our first hearing covered the issue of crime and what States and localities are doing to fight it. Today and tomorrow, we are going to take a close look at the issue of tax reform, an appropriate issue for what is now notoriously known as tax week.

We are currently debating a number of tax cut proposals in the Congress, and we have very large projected surpluses for the next 10 years. Someone said, let us not cut taxes now. Some, like myself, think the time is right for tax relief. One of the things we have to remember when we talk about is what is the appropriate level of taxes? It is that we are not the only ones who tax the American people. There are State taxes; there are local taxes. We need to look at the total tax burden on the American people. When you look at that, it is pretty high. The average family today pays more in taxes than it spends on food, clothing, shelter, and transportation combined. The average tax rate for 440,000 individuals who filed their returns in 1916 was 2.75 percent. In contrast, today's total taxes from all levels of government-Federal, State, and local-stand at a record 32 percent of national income. In fact, Federal taxes alone consume about 21 percent of national income, the highest proportion since World War II. That means one-third of every person's check goes right to the Government. Is that too much? I think so. We have a chart that shows how tax freedom day has been extended between 1964 and 1968.

[The chart referred to follows:]

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Note: Tax Freedom Day denotes the number of days that the average American must work each year to pay their share of federal, state, and local taxes. (Source: The Tax Foundation.)

• Tax Freedom Day, April 13, 1964: In 1964, the average

American worked 103 days to pay their total tax bill.

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• Tax Freedom Day, May 10, 1998: In 1998, the average American

worked 129 days to pay their total tax bill.

Office of the House Majority Leader

www.freedom.gov

Mr. BURTON. This chart shows what is known as tax freedom day has gotten and later and later over the years. According to the Tax Foundation, in 1964, the average American worked 103 days until April 13 to pay their total tax bill, including Federal, State, and local taxes. Last year, tax freedom day was May 10th. The average American worked 129 days to pay their total tax bill. My point is when we are making important decisions on Federal tax policies, we need to take the total tax burden on the American people into consideration. Moreover, we must remember that not all States are fortunate enough to have innovative Governors like the ones we have here before us today. A number of States are still faced with Governors and legislatures who have yet to understand the importance of tax relief and reform and continue to burden their citizens with tax increases and more government bureaucracy.

The committee's hearing will demonstrate how the Governors are doing their part to deal with this at the State levels, specifically, how they have reformed their respective State tax system to put more money in their citizen's pockets.

From crime to education and from welfare reform to taxes, State and local governments have led the way in reforms. For example, much of the highly successful welfare reform law we passed in the 104th Congress was taken directly from reforms first enacted by Wisconsin's Governor, Tommy Thompson, who will testify before our committee next week. President Clinton vetoed welfare reform twice, but once the law was enacted it revolutionized the welfare system across America. Also in response to the Governors and mayors, the Republican Congress curbed the practice of imposing unfunded Federal mandates which place burdensome demands on States and local governments.

Over the next several months, the committee will continue our series of hearings entitled, “National Problems, Local Solutions: Federalism at Work,” by examining the issues of welfare reform and education. Through these hearings, the committee will continue to highlight successful and innovative reforms at the State and local levels, so that many of the solutions to the problems facing America come from the State and local levels and not from Washington; determine which existing Federal programs best assist cities and States, and explore new ways that the Federal Government can help State and local governments in the most cost-ef

Today's hearing is entitled, "Tax Reform in the States.” The Governors we will hear from today have all worked hard to ensure that the citizens of their respective States keep more of their hardearned money instead of sending it to the State House. On that point, especially, the Federal Government can learn a lot. The Governors that are going to testify today and tomorrow have set an example for the Congress and the President, because these Governors recognize that the American people know best how to spend their own money. Furthermore, these Governors are included in the ranks of many Governors nationwide who have not only given more money back to the citizens but have stimulated economic growth while maintaining critical government services.

Take Governor Mike Huckabee of Arkansas, for example, in 1997, he worked for an across-the-board tax cut for the citizens of

fective way.

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Arkansas. In addition, he has eliminated the State marriage tax penalties, something that we haven't done here in Congress. Governor Huckabee is now working to eliminate the State capital gains tax, something else that Congress should do. Governor Christine Todd Whitman, who is our first guest today, of New Jersey has cut every type of tax imaginable, including some taxes many people probably didn't even know they were paying, such as a tax on yellow pages advertising- I didn't know about that. Virginia

Governor I Jim Gilmore ran for election on and got the State legislature to pass an elimination of the car tax. He also proposed and passed tax exemptions for military personnel in order to give them a much needed financial break. And Governor Pataki of New York has also enacted tax cuts 36 times, saving the taxpayers of New York $19 billion. These Governors certainly deserve our attention.

First, this morning, we are going to hear from Governor Whitman of New Jersey, a very intelligent, articulate, and attractive young lady. According to Governor Whitman, “We are not giving anything back to the people; we are just taking less of what is already theirs.” She was elected in 1993 on her commitment to make New Jersey government more responsible with taxpayers' dollars. She promised tax cuts and a more efficient government, and she has delivered. On her watch, New Jersey has added 300,000 new jobs; crime is at the lowest level it has been since 1974, and she has enacted at least 17 tax cuts.

The centerpiece of her tax reform plan has been the 30 percent cut of State income taxes. In three installments, she cut 30 percent for most New Jerseyans. In addition, she has taken care of the lowest income bracket by eliminating State income taxes altogether for 380,000 people in her State earning $7,500 or less. These are just a few of her many successes, but, most recently, Governor Whitman proposed a $1 billion school tax rebate to help further ease the tax burden of New Jersey citizens. This legislation is currently making its way through the New Jersey Legislature.

I will talk about Governor Huckabee and the other Governors, subsequently, when they appear before our committee, but, right now, before I introduce our guest, Mr. Waxman, do you have any comments?

Mr. WAXMAN. Yes, thank you very much, Mr. Chairman. I guess no one should be at all surprised that today's hearing is on taxes. It seems that every year, Republicans use the days around April 15th as a time to score political points. The chairman said that the Federal taxes are consuming the highest percentage of national income than at any time since World War II. This is not true. According to a recent analysis by the Treasury Department which looked at average income tax rates for a family of four, the average tax rate for a family earning the median income is at its lowest rates since 1965. For a family earning twice the median income, the rate is the lowest it has been in 25 years. The average income tax rate for a family earning one-half the median income is lower than any year covered by the report which goes back to 1955, and I have a chart over here which illustrates this point.

Another myth is that States deserve all the credit for tax cuts we are going to hear about today, but the reality is that it is the strong economic growth under President Clinton, the longest peace

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