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.
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.
"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.
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