A basic tenet of public finance holds that people tend to do less of something when it is taxed. Raise income tax rates and some people will work less. Boost the gas tax and people will drive less. Hike the cigarette tax and people will smoke less. That inexorable law of demand poses two problems for the taxman. First, taxes distort behavior as people move from taxed activities to those that are taxed less or not at all. Sometimes, as in the case of cigarette taxes, we want to discourage the taxed activity. In other cases, the tax only makes the economy less efficient. Second, tax avoidance may reduce the revenue gained from a tax increase—or even negate it entirely. For example, if gasoline sales plummet when gas taxes rise, we get less revenue to build and maintain roads.

I am not just a tax wonk. For the past couple of years, when I wasn’t blogging on TaxVox, I was writing a book on long-term care. Caring for Our Parents critiques what is a completely irrational system for delivering and paying for these services. I had the great fortune of being able to tell this story through the eyes of both those who are receiving assistance and their families. About 10 million Americans need this care, and as many as 40 million of us help family members and friends—either the frail elderly or those with disabilities. Long-term care is hugely expensive. On average, a year in a nursing home costs $75,000 and home health aides cost $19 per hour. In 2007, we spent $230 billion on paid assistance. But that pales in comparison with the economic value of informal care provided by family members, which AARP estimates at $375 billion.

During the 2008 presidential campaign, much was made of candidate Obama’s proposal to boost taxes on “high-income” taxpayers. Campaign attack ads warned those folks—couples with income over $250,000 and others with income over $200,000—that a big tax increase was on the way. Joe the Plumber complained that the tax increases would stifle his unborn entrepreneurial dreams.

Yesterday, conservative Republicans rolled out their health reform plan. The Patient’s Choice Act is an interesting mix of Massachusetts-like exchanges and other reforms intended to boost the individual insurance market. But, no surprise, its centerpiece is a giant tax cut.

To no one’s surprise, California voters yesterday rejected 5 of 6 ballot measures intended to address the state’s budget problem. The propositions would have addressed the problem as it existed in February, not now. The state then faced a $40 billion gap between revenues and expenditures over 18 months. Lawmakers managed to close the gap after a marathon emergency session. However, thanks to California’s labyrinthine budget rules, about $6 billion of these solutions required voter approval. Hence, the state’s third special election in six years.

Describing his financing options for health reform yesterday, Senate Finance Committee Chairman Max Baucus (D-MT) delivered two messages: A) Eliminating the tax exclusion for employer-sponsored health care is off the table and B) He would still like to find a way to curb this hugely expensive and inefficient subsidy. Baucus' bipartisan alternatives for limiting the exclusion cover the proverbial waterfront. Congress could cap the subsidy based on the value of the insurance plan, the income of the policyholder, or both. It could index the cap based on health care inflation, the consumer price index, or growth in GDP. It could “grandfather” existing union-negotiated plans, or not. What Baucus seems to be saying is: I’ll do whatever it takes to reduce the value of the exclusion, even if it is only a small step toward eventual repeal.

Californians vote tomorrow on six ballot measures addressing their state's perennial budget problems. If nothing passes, California will face a $20 billion budget shortfall. If everything passes, the deficit drops to—drum roll, please—$15 billion. Big numbers but not unusual for the Golden State. The bigger issue is whether California, or any other state, should budget by initiative.

Taxes aren’t just for grown-ups. In fact, our new Urban/Brookings study estimates that 40 percent of all federal expenditures spent on infants and toddlers flows through the tax system. That’s more than $22.8 billion. The two main programs that drive this spending are the earned income tax credit (EITC) and the child tax credit (CTC). Although both allocate fairly large percentages (18%) of their total program expenditures to families with infants and toddlers, they differ dramatically in the benefits that are refundable and those that are not. The EITC is fully-refundable, so in 2007 (the most recent year of available data), almost 90 percent of benefits received by families with infants and toddlers ($7.1 billion) came as a tax refund. In contrast, only one third of the partially refundable CTC benefits ($2.8 billion) were refundable, so most of CTC’s benefits reduced tax liability but failed to put cash back into needy families’ hands.

Last month I posted depressing state revenue data showing that total state tax collections fell in the last quarter of 2008 for the first time since 2002. I predicted that the situation was “going to worsen before it gets better,” a pretty safe bet given the continuing deterioration of state economies.

Medicare’s Part D drug benefit is going to cost taxpayers a lot of money. A really, really lot of money. You can find the story deep in the bowels of the Medicare Trustees report that was released earlier this week. It is a nice little case study of how a well-intentioned government program can add tens of billions of dollars annually to the federal deficit. And it is a cautionary tale of how hard it will be to bring medical costs under control, despite the promises of the Obama Administration and industry lobbyists.