What Is an Earmarked Tax?

by Andy Pasquesi

Listening to the news lately, you have probably heard both Democrats and Republicans attacking something called "earmarks" in federal legislation. Charged by some as devices for cloaking "quid pro quo" and other forms of political corruption, this concept of earmarks is completely separate from "earmarked taxes." This article will help the reader understand the history and modern usage of earmarked taxes, as well as the economic arguments both for and against them.

What Is An Earmarked Tax?

An earmarked tax is a tax whose revenues (by law) are reserved solely for a specific group or usage. In general, the funding received by the recipient earmarked tax revenue is limited to those tax revenues. That said, there are cases where earmarked tax recipients will have additional funds from the general budget allocated to it; for example, schools are usually funded by property taxes, but failing inner-city schools will often receive additional federal aid.

Examples of Earmarked Taxes

As previously noted, property taxes are earmarked to fund education. Additionally, taxes on gasoline are used to pay for highway construction, heavy manufacturers who release pollutants into the environment must pay taxes that support "Superfund" (a government organization tasked with cleaning up or "remediating" brownfields, flooded abandoned mines and other hazardous areas) and a set portion of your payroll taxes goes directly to Social Security (it lists the exact amount on every single paycheck).

What Are Earmarks in Legislation?

According to the U.S. Constitution, allocation of all funds from the U.S. Treasury (e.g., tax revenue) must be outlined within a piece(s) of legislation and ratified. The House and Senate Appropriations Committees draft omnibus (i.e., for many different programs) spending bills and submit them to their respective assemblies for open debate. Allocating funds to a certain organization (usually in the form of a lump sum for their annual budget) in legislation is known as earmarking. Currently, the earmarking process is anonymous: the Appropriations Committees hold closed sessions, and members are not required to attach their names to any earmarks they add. In addition to anonymity (which doubles as a lack of accountability), the size of these bills (literally thousands of pages, often with handwritten changes that can't be screened for keywords electronically) and the relative haste with which they are passed drastically reduces the transparency of the federal budget vis-a-vis the public. As a result, the opportunity for kickbacks and stronger lobbyist influence increases.

Arguments in Favor of Earmarked Taxes

In the developing countries governed by weak democracies, earmarked taxes provide the public with greater assurance that the president and his generals aren't simply squandering tax revenues on personal luxuries. The more trusting the public is, the more likely it will agree to pay taxes (as opposed to dodging or cheating on them). In developed countries, earmarked taxes can stabilize the revenue stream from year to year. Assuming that the tax is placed on a fairly stable source (e.g., the employed) or a good with inelastic demand (i.e., price fluctuations have a relatively small impact on demand), earmarked taxes allow recipients to plan useful long-term projects based on a projected annual income. This prevents the kind of budgetary shortfalls that would force recipients to leave machinery unused, facilities closed or services suspended until next year's spending bill is passed.

Arguments Against Earmarked Taxes

The arguments against earmarked taxes usually boil down to theoretical economic models. Pro-earmark economists claim that a voter would be more likely to approve of a tax increase if the addition amount were reserved for a program he or she agrees with. The same voter would not approve of a general tax increase of the same amount because some of that revenue could be spent on programs he or she doesn't agree with. Essentially, earmarked taxes allow for a more optimal distribution of resources, similar to the economics of the private sector. Meanwhile, anti-earmark economists point out that most voters are largely ignorant of countless expenditures that, while essential to the social and economic well-being of the country, don't receive media attention. Despite the nuisance of pork-barrel projects inserted into spending bills by the House & Senate Appropriations Committees, these committees have the benefit of countless official reports written by industry analysts, scientific bodies and other properly vetted specialists. The more tax revenues limited by earmarks, the less revenue available to fund critical (albeit abstruse) programs and institutions. Unable to function effectively, these little-known recipients fail and, by the time the public realizes their importance, it's too late.

About the Author

A Chicago-based copywriter, Andy Pasquesi has extensive experience writing for automotive (BMW, MINI Cooper, Harley-Davidson), financial services (Ivy Funds, William Blair, T. Rowe Price, CME Group), healthcare (Abbott) and consumer goods (Sony, Motorola, Knoll) clients. He holds a Bachelor of Arts in English from Harvard University but does not care for the Oxford comma.

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