For the first time in history, studies are showing that Federal aid has become the top revenue source for state and local governments. In addition to helping out other government agencies in the country, the Federal government has also spent billions of dollars bailing out banks, insurance companies, and U.S. automakers.
With all of this spending, you would think the government would have enough revenue to support it. However, last year the Federal government reported a huge decrease in tax revenue, which has left lawmakers scrambling to find ways to raise more funds. With recent news that the Obama administration might be considering another expensive stimulus package, I began wondering how much more spending the Federal government can continue to afford? If the administration continues on it’s current path, then odds are us taxpayers are going to have to pay for it through higher taxes. To help all of my readers understand this situation, I have put together the following list of potential sources for federal revenue that you should be on the lookout for.
1. Value Added Tax
Recently the idea of instituting a Value Added Tax (VAT) has been getting a lot of attention in the media. Last month, Democratic Senator Kent Conrad even proposed the idea to the Obama administration. The idea behind a VAT is simple: it is basically a Federal sales tax that is levied on the transfer of nearly all goods and services. Although popular in European countries, the idea of a VAT tax in America has very little public support. As I explained before in an entry titled Is a Value-Added Tax the Answer, this type of tax is regressive by nature. In a time where everyone is tightening his or her personal budget, this type of tax would probably only hurt our economy further.
2. Internet Taxation
From it's humble beginnings, the world wide web has been the scene of a never ending debate as to whether taxes should work the same way online as they do offline. As of today, there are some states that levy sales taxes on Internet purchases, but there are no such taxes on the Federal level. Although creating a new Federal Internet sales tax would be difficult, there are a number of other ways the Feds could try to squeeze some revenue out of the Internet. They could tax Internet access and connections; they could place a tax on Internet providers, or even levy a tax on e-mail usage. Fortunately, the Internet Tax Freedom Act prevents any of the aforementioned taxes, but if the government got desperate enough then they could begin eyeballing Internet taxes.
3. Capital Gains Tax
During his campaign President Obama was adamant about increasing the capital gains tax rate. At the time he claimed that such an increase would be “fair” to the American public, but after winning the election the increase never came to fruition. However, even though doubling the capital gains rate is pretty unlikely, the Obama administration could easily revert back to their original idea of increasing the capital gains rate by a few percentage points.
4. Taxes on the Marriage Industry
As I had mentioned in a previous entry, Miriam Marcus of Forbes magazine has suggested that if the Federal government recognized marriages between same-sex couples then it could stimulate the struggling wedding industry. If the U.S. Supreme Court did decide to extend marriage rights to gay couples, then you can expect that the government will look for a way to get some money from the increase in business that the wedding industry would experience. Some estimates say that the government could see up to $10 billion in additional revenue, which is a pretty sizeable amount of money.
5. By-the-Mile Road Tax
To help generate federal revenue, some experts are beginning to warn that the government might consider shifting to a by-the-mile tax system to replace current fuel charges. In a by-the-mile system a GPS device in taxpayers cars would calculate the total tax due based on miles driven. This would require some serious technological advances, but a federal commission reportedly claimed that the by-the-mile tax was the “best path forward to keep revenues flowing to highway and transportation projects.” However, many Americans would surely not like the idea of the federal government monitoring their vehicle’s location and I would say that this program is quite unlikely to be implemented in the next decade.
6. Taxes on Employer Provided Health Care
As the country struggles to find a solution to our current health care problems, one idea that has been supported by the Obama Administration is the idea of taxing employer provided health care programs. They claim that it could supplement the cost of a government provided health care, but this tax would go directly against Obama’s campaign promise not to raise taxes on any one making under $250,000.
7. Green Energy Advancements
It is no secret that green energy advancements are very popular among the American public. Although some experts suggest that now is not the time for expensive green technology advancements, the majority of American taxpayers seem to support the idea of “clean energy” and are willing to pay more for it. Now that many of the hybrid related tax credits are expiring, you can expect that the government is going to try to assess taxes on “green energy” sources, just like they do with petroleum and diesel.
8. Increased Compliance Enforcement
Every year the tax gap—or difference in what the government should collect in tax revenue and what they actually do collect—gets larger and larger. Last year, the total number of audits performed on businesses and taxpayers with yearly incomes over $1 million decreased drastically. Some government officials are claiming that by revitalizing the Internal Revenue Service with better equipment and more efficient audit strategies, they could collect a few billion dollars extra each year in Federal revenue. However, this comes at a time when some taxpayers are struggling to put food on the table let alone deal with aggressive IRS auditors.
9. More “Sin Taxes”
Taxes levied on certain products, such as cigarettes and alcohol, are frequently referred to as “sin taxes.” Although they are often thought to discourage certain behaviors, they also generate a considerable amount of federal revenue. Estimates say that in 2007 alone the Federal government collected nearly $7 billion from taxes on cigarettes alone. As the economic troubles continue, tobacco and alcohol sales have stayed consistent, and you can bet that the government has taken note. Whole websites, books, multiple blogs, and articles have been dedicated to the idea of preventing any more of these taxes. Many Americans who purchase tobacco products or alcohol feel it is their right to do so with out being forced to pay extra taxes.
Also, there are some rumblings about legalizing some additional “sins” (e.g. marijuana, prostitution, gambling, etc.) to increase the tax base. But so far, these rumblings are only coming from the local or state level. Nevertheless, you can bet that the federal government will make sure to join the party were any state to legalize these products or services.
10. Budget Cuts
This seems like the ultimate no-brainer—if you are looking for ways to save money then reduce the amount you are spending. Unfortunately, the Feds have yet to wholeheartedly embrace cutting spending. So far, only state and local government grants have been cut (by about $18 billion) and several aid programs have been cut or reduced, but this is not enough. To really save money the Federal government needs to make drastic cuts. The state of California has been able to reduce their budget by millions by giving pay cuts to state employees. The Federal government might also benefit from pay reductions, but there are lots of other options. President Obama has proposed implementing a pay-as-you-go system where for every dollar the government spends a dollar is cut somewhere else. However, it is going to take more then just a fancy name to reduce Federal spending.