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States move to slash income taxes to stimulate growth

Published: Monday, Jan. 21 2013 9:15 a.m. MST

Kansas Gov. Sam Brownback makes a point in discussing the state's finances during a news conference, Wednesday, July 25, 2012, at the Statehouse in Topeka, Kan. Brownback argues that income tax cuts approved this year won't cause big budget problems in the future, as critics fear.

Associated Press

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Republican governors in Kansas, Nebraska and Louisiana and policy advocates in North Carolina are touting a shift in tax policy away from income taxes and toward sales taxes, arguing that this would bring businesses and jobs to their states, in part by lowering the compliance costs associated with corporate and personal income taxes.

"When I started as governor, we had the highest state income tax in the region," Kansas Gov. Sam Brownback said last week in his State of the State address. "Now we have the second lowest, and I want us to take it to zero. Look out Texas, here comes Kansas!"

Texas is one of seven states with no income tax. Alaska, Florida, Nevada, South Dakota, Washington and Wyoming are the others, and Tennessee and New Hampshire only tax dividend and interest income.

But Texas makes up for it by having the third highest property taxes nationally. Brownback, on the other hand, thinks that he can eliminate income taxes in Kansas without raising other taxes.

"By making government more efficient and growing our economy," Brownback said in his annual address, "we can keep the sales tax flat at its current level and cut income taxes on our lower income working families to 1.9 percent and drop the top rate to 3.5 percent. This glide path to zero will not cut funding for schools, higher education or essential safety net programs."

Proponents of the move against income taxes believe it will create growth and jobs, and they claim to have the data to prove it. They argue that shifting the tax base toward consumption allows wage earners and investors to retain more of their "next dollar earned," especially if they choose to save or invest it. With a progressive income tax, they argue, "next dollars" are hit harder and harder, thus discouraging productivity and investment.

Critics see consumption taxes as a dubious talisman that cannot deliver greater prosperity but that will put greater burdens on the poor. The poor, they argue, consume almost all their income and would thus bear a proportionally greater share of a consumption tax regime.

A policy vogue

Louisiana Gov. Bobby Jindal and Nebraska Gov. Dave Heineman both joined Brownback last week in proposing that their states abandon income tax.

"Our current tax system needs to be modernized and reformed," Heineman said in his State of the State address on Jan. 18. "It's been nearly five decades since Nebraska had a serious debate about our overall tax system. Life has changed drastically since the 1960s, when we were operating in a completely different economic environment."

Heineman and Brownback were put in the shadow of the more prominent Gov. Bobby Jindal in the larger Louisiana.

"The bottom line is that for too long, Louisiana's workers and small businesses have suffered from having a state tax structure that is too complex and that holds back economic prosperity," Jindal said in a public statement on his website. "It's time to change that so people can keep more of their own money and foster an environment where businesses want to invest and create good-paying jobs."

Jindal said eliminating the complex income tax would make the state more attractive to investors, stimulating economic growth.

Tar Heels

Then there is the Civitas Institute, a conservative North Carolina think tank, which argues that the Tar Heel State would have seen significant economic growth had it dumped its income tax earlier.

"A consumption-based tax reform could increase North Carolina's average rate of personal income growth by 0.38 percent to 0.66 percent per year," wrote Civitas' Francis DeLuca in the Washington Times.

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