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States move to slash income taxes to stimulate growth

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

"These numbers aren't surprising, given that states with no personal income tax have average annual growth rates 0.5 percent higher than other states, and states without corporate income taxes average a full percentage point higher each year," Deluca wrote.

David Balfour of Civitas said that North Carolina's corporate and personal incomes taxes are both the highest in the Southeast region. Lawmakers in North Carolina have known for years that their tax rates make them uncompetitive in the region, he said. The Civitas proposal would broaden the sales tax, which currently only applies to goods, extending it to most services as well.

"Most states tax relatively few services," Balfour said. "Each state taxes small number of services, but each taxes different services." The plan, Balfour said, is to collect all of the pieces of service taxes from around the country and employ them all in North Carolina.

Who gets hit?

Like Civitas, Jindal in Louisiana plans to replace his state's lost income taxes with sales taxes, a move some see as "regressive." That is, they argue it would shift burdens from the wealthy to the poor.

Louisiana already has some of the highest sales taxes in the nation, said Ben Harris of the Urban Institute, "and to make up the revenue you would have to push the sales tax well above 10 percent."

The problem, Harris said, is that "low-income households devote a higher share of their income to consumption, since they spend less and save more." The impact on the poor is critical in Louisiana, which Harris said is already the sixth most unequal state.

But the regressivity argument does not persuade Balfour, who argues that the cash value of food stamps, Medicaid and subsidized child care subsidies are being lost in those equations.

"The problem I see with measures of sales tax regressivity is that you can't have a very accurate measure of tax burden as a share of income when you are leaving out a significant source of income for a segment of the population."

Balfour points to a recent study by the Pennsylvania Department of Public Welfare, which found that net welfare benefits create perverse incentives when added together.

"The single mom is better off earning gross income of $29,000 with $57,327 in net income and benefits than to earn gross income of $69,000 with net income and benefits of $57,045," the report argued.

email: eschulzke@desnews.com.

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