Paul L. Caron

Wednesday, January 30, 2013

WSJ: States Embrace Tax Reform to Drive Economic Growth

Wall Street Journal editorial:  The State Tax Reformers:

Washington may be a tax reform wasteland, but out in the states the action is hot and heavy. Nine states—including such fast-growing places as Florida, Tennessee and Texas—currently have no income tax, and the race is on to see which will be the tenth, and perhaps the 11th and 12th.

Oklahoma and Kansas have lowered their income-tax rates in the last two years with an aim toward eliminating the tax altogether. North Carolina's newly elected Republican Governor Pat McCrory has prioritized tax reform this year and wants to reduce the income tax. Ditto for another newcomer, Mike Pence of Indiana, who has called for a 10% income-tax rate cut. Susana Martinez, New Mexico's Republican Governor, has called for slashing the state corporate tax to 4.9% from 7.6%, and the first Republican-controlled legislature since Reconstruction in Arkansas is considering chopping its tax rates by as much as half.

But those are warm-up acts compared to Nebraska Governor Dave Heineman's announcement this month that he wants to eliminate the state income tax and replace it with a broader sales tax. ... Then there's Louisiana Governor Bobby Jindal, who wants to zero out his state's income tax (top rate 6%) and the 8% corporate tax and replace them by raising the state's current 4% sales tax. ...

A new analysis by economist Art Laffer for the American Legislative Exchange Council [Rich States, Poor States] finds that, from 2002 to 2012, 62% of the three million net new jobs in America were created in the nine states without an income tax, though these states account for only about 20% of the national population. ...

This state reform trend is a rare bright spot in the current high-tax era, and it will further sharpen the contrast in economic policies between GOP reform Governors and the union-dominated high-tax models of California, Illinois, New York, Massachusetts and now Minnesota, where last week Governor Mark Dayton proposed a huge tax hike. Let the policy competition begin.

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> For them, and for the zero net federal taxpayers, a no-income-tax state is gravy.

No, it isn't. They pay other state taxes. In other states, some of those revenues come from a state income tax, which, presumably, they wouldn't pay.

Posted by: Andy Freeman | Jan 31, 2013 4:38:14 PM

How little you understand the left. They will demonize those states and find a way to disproportionately tax away their newly achieved prosperity. In other words: You got it? They want it. They'll get it — whatever it takes.

Posted by: PacRim Jim | Jan 31, 2013 12:52:00 PM

But the state income tax is just a deduction against income, it's not a tax credit. So it's not like you get back in reduced federal taxes 100% of what you spent in state taxes. You only get back your marginal tax rate. So the "subsidy" idea is flawed. Lots of Americans don't earn enough to itemize because they don't have deductions more than the standard exemption. For them, and for the zero net federal taxpayers, a no-income-tax state is gravy.

Posted by: kentuckyliz | Jan 31, 2013 12:04:07 PM

One interesting angle on this (and I may have first read this idea on this blog. I can't remember.) has to do with claiming state income taxes as a deduction on one's federal income tax filing. Residents of high income tax states are basically being subsidized by residents of low income tax states with regards to contributions to the federal money pot. Essentially, states that tax income heavily and use that money for public amenities like parks and recreation, etc. are taking advantage of states that don't tax their residents income as heavily but also don't provide as many public amenities.

So, the relatively poor people trying to scratch out a living in the mountains of Tennessee and the swamps of Louisiana are basically subsidizing federal income taxes for the rich elites in Massachusetts, California, and New York so they can have nice parks and such.

I think we should eliminate state income taxes (as well as other local taxes) as a deduction against one's federal income tax, and simultaneously lower federal income tax rates. I think if we did that, you'd suddenly see a lot more people in "Blue" states eager to lower their state income tax rates.

Posted by: Sam | Jan 31, 2013 10:57:12 AM

Even with a Republican Governor and legislature, here in Michigan the local authorities all seem [per a Michigan Public Policy org] to regard 'reform' as merely raising various taxes.

While there has been some reform, much of it is in abeyance while it gets fought through the courts.

Posted by: JorgXMcKie | Jan 31, 2013 10:25:01 AM