A permanent tax cut is superior to a temporary tax cut because it will reduce administrative costs. If one doubts the advantages of a permanent income tax cut on administrative grounds all one has to do is compare HB 1008, which is two pages long, with HB 1001, which is twenty one pages long. Over the five year forecast period the latter bill will entail in excess of one million dollars in administrative costs, ten time the administrative costs of the permanent tax cut bill. Given the increased opportunities for rent seeking and logrolling that accompany debates over temporary tax cuts and rebates each year, one suspects that the administrative costs of the temporary tax cut are even higher than those estimated for HB 1001. There is a more fundamental reason for the superiority of the permanent tax cut, and this is because of the way that this affects peoples incentives.
People perceive a permanent tax cut as increasing their lifetime income.
As a result a permanent tax cut significantly increases peoples incentives to work, save, invest, and engage in productive activity. The resulting supply side effects increase income and the tax base, partially offsetting the effects of lower tax rates on tax revenues. Numerous studies at the state and national level support this argument, including our own work on Colorado tax reform. In contrast, because temporary tax cuts are perceived as short term and at the whim of the legislature they do not have positive supply side effects comparable to permanent tax cuts. A permanent income tax cut leaves ample room for other tax cuts in Colorado.