February 18, 2013
Sullivan: Can States Swap Sales Taxes for Income Taxes?
Among the 44 states with significant income tax revenue, only a few could repeal their income taxes, replace the lost revenue with sales taxes, and keep sales tax rates below 8% with their current sales tax base (or, for those without sales taxes, with a tax base equal in breadth to the average of other states). They are New Hampshire, Alaska, Montana, Hawaii, and Florida. Two more states, New Mexico and Alabama, might also be able to repeal their income taxes and keep sales tax rates below 8% if they aggressively expanded their sales tax base. In general, states where a tax swap is most likely have relatively low income tax collections and relatively low sales tax rates.
If states already had broad-based consumption taxes in place, a widespread phaseout of state income taxes might be a real possibility. Concerns about regressivity could be addressed with a sales tax rebate to low-income households. But as long as states rely on sales taxes that exclude most services and include business inputs, the difficulties in most states will be insurmountable and the desirability questionable.
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