Will killing the state income tax save the middle class or hurt the poor?

Published: Wednesday, Jan. 16 2013 3:50 p.m. MST

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Republican governors in two states and legislators in a third are touting a shift in tax policy away from income tax and toward sales taxes, arguing that this would bring businesses and jobs to their state.

Critics fear that the move would place greater burdens on the poor, who currently are largely exempt from sales taxes and who spend a greater share of their disposable income on taxable goods.

Gov. Bobby Jindal in Louisiana called for dumping the income tax last week, and he was joined on Tuesday by Gov. Dave Heineman in Nebraska.

“Our current tax system needs to be modernized and reformed,” Heineman said in his State of the State address. “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.”

"Eliminating personal income taxes will put more money back into the pockets of Louisiana families and will change a complex tax code into a more simple system that will make Louisiana more attractive to companies who want to invest here and create jobs," Jindal said, according to Reuters.

Currently seven states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, according to govspot.com. Tennessee and New Hampshire only tax dividend and interest income.

Such states have to make up the income somewhere, and not surprisingly, Texas has very high property taxes.

Some critics of the no-income tax agenda doubt the jobs upside and fear the inequality downside "since low-income households devote a higher share of their income to consumption," wrote Ben Harris at the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.

In a sales tax regime, Harris argued, the poor end up paying "higher effective tax rates than higher-income households, which tend to spend less and save more. This concern is particularly stark in Louisiana, which was recently ranked as the sixth most unequal state in the country by one measure of inequality."

Louisiana already has high sales taxes, pushing 9 percent when local and state taxes are combined, though the state does currently exempt food and home utilities.

On the other side is a new report by the Civitas Institute, a conservative North Carolina think tank, 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."

Eric Schulzke writes on national politics for the Deseret News. He can be contacted at eschulzke@desnews.com.

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