March 29, 2013

States Considering Unfair Tax Code Changes

Several states are considering making tax changes that will increase inequality and lead to an unfair state tax code.

In Louisiana, for example, Governor Bobby Jindal has a plan to eliminate his state’s income tax and replace it with a sales tax. Jindal’s plan would disproportionately benefit those in the highest tax brackets while putting a higher burden on the poor and small businesses.

In Kansas, a similar scheme has developed. After cutting the state income tax, Kansas is considering keeping their sales tax elevated to make up for lost revenue:

Last year’s cuts created a budget shortfall, and Brownback has promised to protect important programs such as education funding and social services.

Meanwhile, the state’s 6.3 percent sales tax is scheduled by law to drop to 5.7 percent in July, the result of a budget-balancing agreement in 2010 that temporarily boosted the tax to its current level. Legislators in both parties don’t want to break the pledge, but some are willing to do it with the promise of future income tax cuts.

“There’s just the budget reality,” Brownback said. “I think it’s coming across to people that you’ve got to get your resource package somewhere. The budget doesn’t work without the tax piece of it.”

Critics of Brownback’s push toward phasing out personal income taxes note it would force the state to rely most heavily on its sales tax to finance government. Poor families tend to pay a higher percentage of their incomes to that tax than do wealthy ones.

States like Missouri, Arkansas and Wisconsin have also been considering income tax cuts. Though those pushing these cuts claim that they help the economy, a Center on Budget and Policy Priorities report shows that there is very little evidence for that claim:

Similarly, the biggest tax cutting states of the 1990s — all of which enacted substantial personal income tax cuts — also did not perform particularly well in later years.

  • States with the biggest 1990s tax cuts grew jobs during the next economic cycle at an average rate one-third the rate of states that were more cautious.
  • The biggest tax-cutting states also had slower income growth.  In none of these states did personal income growth in the next economic cycle exceed inflation.

These anecdotes illustrate an important finding from a multiplicity of empirical academic studies conducted by economists over the last 40 years.  The vast majority of these studies find that interstate differences in tax levels, including differences in personal income taxes, have little if any effect on relative rates of state economic growth.  Of the eight major studies published in academic journals since 2000 that have examined the broad economic effect of state personal income tax levels, six have found no significant effects and one of the others produced internally inconsistent results.

Even though there’s very little evidence that the tax cuts will spur growth, the process is dominated by the interests of big business and the wealthy. We need to do what we can to reverse this problem.

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