Workers & Economic Inequality

Republican Governors Promise Tax Cuts for “Job Creators” Financed by Higher Taxes on the Poor

Blog Post by: Benjamin Landy , on January 16, 2013

Image via Shutterstock

In the days and weeks after Mitt Romney’s electoral defeat, there was what seemed like an endless stream of hand-wringing and soul-searching among Republican elites. The political landscape had changed overnight, forcing rising stars within the party to acknowledge the need for greater diversity, a new position on immigration reform, and a less exclusive rhetoric. Foremost among these would-be reformers was Louisiana Governor Bobby Jindal, who made waves when he told Politico, "We got to make sure that we are not the party of big business, big banks, big Wall Street bailouts, big corporate loopholes, big anything. We cannot be, we must not be, the party that simply protects the rich so they get to keep their toys.”

Yet, less than two months after he made those comments, Governor Jindal is back in the news for a considerably less egalitarian proposal: Jindal wants Louisiana to abolish both its personal and corporate income tax, which are moderately progressive, and replace them with a highly regressive state sales tax. The effect, as many analysts have already pointed out, would be a massive tax break for the wealthy—over $25,000 on average for the top one percent—financed by higher taxes on the bottom 80 percent, who spend a higher percentage of their income on things like food and utilities. The greatest impact would be felt by those in the lowest quintile, who would see their average after-tax income fall 3.4 percent, according to the nonpartisan Institute on Taxation and Economic Policy—roughly the same tax pain as falling off the "fiscal cliff."   

Some Republican states want to switch to a regressive sales tax system

Doubling down on discredited "trickle-down" economics is a poor way for Republicans to shed their image as "the party that simply protects the rich so they get to keep their toys." But Louisiana's Jindal is not the only governor helping to prove how little conservative ideology has evolved. Similar plans are being promoted by Republicans in Kansas, Oklahoma, and North Carolina (which is also considering a business license fee that would make it harder for low-income people to start their own businesses). The passage of any of these regressive tax schemes would no doubt embolden lawmakers in the twenty-one other states with single-party Republican control.

Most pernicious, however, is the way in which the repeal of personal and corporate income taxes—and the commensurate rise in state sales tax—accomplishes several conservative goals simultaneously. All regressive tax systems increase the effects of income inequality by shifting the tax burden from the rich to the poor. But the switch to a sales tax also means state revenue streams are far more vulnerable to the business cycle, compounding the austerity effects of shrinking state budgets and public sector layoffs during economic downturns. This is, however an intended outcome for the conservative vanguard, for whom lower, less predictable tax revenues are designed to "starve the beast"—forcing state and local governments to cut social programs and other allegedly growth-inhibiting spending.

Although research shows no relationship between state income tax rates and economic growth, Republican legislators leading the push for state tax reform continue to insist that while the poor would be hit disproportionately by a higher sales tax, cutting income taxes is proven to spur job creation. To back up their claims, conservatives point to a November 2011 report by "trickle-down" theorist Arthur Laffer that purports to show a "negative and highly significant" relationship between state tax rates and economic growth. Laffer reaches this conclusion by misleadingly combining federal and state tax rates over the 2001-2008 period, when federal tax rates were falling and the economy was growing from the bottom of a recession to the peak of the housing bubble. When Laffer's model is corrected to include only the variation in state tax rates, the relationship between states' tax rates and economic growth "actually becomes positive and insignificant," according to a 2012 rebuttal from the Institute on Taxation and Economic Policy. 

Unfortunately, such empirical evidence has had little effect on Rhodes Scholar Bobby Jindal, who two months ago called on fellow Republicans to "stop being the stupid party. " Perhaps it will take another electoral defeat in 2014 for the realization that tax cuts for "job creators," financed by tax hikes on the bottom 80 percent, are neither an intelligent nor winning proposition. 

Tags: economy,

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