Blog Post by: Benjamin Landy, on February 1, 2013
Tax cuts may be off the table in President Obama's newly progressive Washington for the foreseeable future, but supply-side ideology is still alive and well at the state level. So far, ten Republican-controlled states are considering regressive tax reforms that include reducing or eliminating their personal and corporate income taxes and replacing them with a higher state sales tax; part of a larger push to use states as proving grounds for an increasingly marginalized GOP agenda.
These "trickle-down" tax reforms, which conservatives believe will encourage businesses to move to their states and increase employment, are problematic for a number of reasons. First, all of the revenue lost from reducing or eliminating personal and corporate income taxes must be made up by substantial tax increases elsewhere. In the case of the ten states in the map above, Republican-controlled legislatures and governships plan to offset these losses with higher state sales taxes and other fees.
This is hugely regressive, as research from the nonpartisan Institute on Taxation and Economic Policy (ITEP) has shown. Louisiana's proposed tax swap, for instance, would amount to a massive tax break for the wealthy—over $25,000 on average for the top 1 percent—while raising taxes on the bottom 80 percent. (Nationwide, poor families pay eight times more of their income in sales and excise taxes than wealthy families.) Louisiana's poorest 20 percent would see their average after-tax income fall 3.4 percent, or $395.
But even ITEP's analysis may understate the shifting tax burden from rich to poor. According to Bloomberg's Deborah Solomon, taxpayers have been allowed since 2009 to choose between deducting their state sales tax or income tax. This allows wealthy families, who more frequently itemize their taxes, to deduct higher sales taxes in regressive states like Texas or Tennessee, while also paying little or no state income tax. As a result, the federal government subsidizes these tax breaks to the tune of $3 billion each year.
Although several of the proposed state tax reforms are being promoted as revenue neutral (likely necessitating, as the Center on Budget and Policy Priorities points out, higher property taxes as well), others are purposefully designed to shrink the public sector. Governor Mike Pence of Indiana is one of several Republican lawmakers who want to distribute their state's budget surplus through tax cuts, rather than replenish funding to programs and jobs cut during the recession, thereby locking in recession-era spending levels.
"Government should only collect what it needs," Pence said in his 2013 State of the State address. "When government collects more than it needs, it should return that money to the hardworking taxpayers who earned it in the first place"—as opposed to funding improvements in education or infrastructure. Iowa lawmakers are on the same page, advocating spending the state's billion-dollar surplus on a one-time tax credit of $375, rather than increase funding for schools.
Republicans claim that this race to the bottom—replacing personal and corporate income taxes with regressive sales taxes, cutting social services and public sector jobs—will make their states more attractive to businesses. But, contrary to a widely cited, misleading report by supply-side evangelist Arthur Laffer, there is little evidence that low-tax states experience higher rates of economic growth. The success of resource-rich states like Texas and North Dakota, both of which are enjoying an oil and natural gas boom, cannot be replicated in states like Kansas, which already is struggling to fund its public schools. (The state is currently fighting an appellate court's mandate to increase spending on education.)
Sadly, this "race to the bottom" is a zero-sum game. Research suggests that tax rates have little to do with where individuals and businesses decide to relocate. And even if they did, states that lower their taxes can only steal businesses from one another, resulting in zero net gain for the country overall. The result, intended or not, is a massive giveaway to businesses and high-income individuals at the expense of the public sector, necessary investments in education and infrastructure, and the lower- and middle-class families that are left to finance them.
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