Red state tax "reform" and "economic growth"

by Linda Beale

Red state tax “reform” and “economic growth”

As most tax practitioners and academics know, Professor Paul Caron maintains a “tax prof blog” that provides timely links to most things tax in major papers, blogs, journals, conferences and the like, as well as announcements and releases from theIRS, Treasury and Congress related to tax.  Paul does not usually provide much analysis or opinion, but rather an excerpt or two and a title.

So a recent blog post was titled  “WSJ: States Embrace Tax Reform to Drive Economic Growth“.

This is not an atypical way of titling items on tax prof blog.  The observant reader will notice a slight bias in the title.  The Wall Street Journal article is actually titled “The State Tax Reformers: more governors look to repeal their income taxes” (Jan 29 2013 updated).  The article summarizes states that are lowering or eliminating their income tax (sometimes including their corporate income taxes) and sometimes replacing it with a broad sales tax–for example, in the Republican strongholds of Nebraska and Louisiana.  The Journal article then goes on to opine (and it is indeed opinion) that “this swap makes sense” because “income taxes generally do more economic harm because they are a direct penalty on saving, investment and labor that create new wealth” whereas “sales taxes … hit consumption, which is the result of that wealth creation.”  This is the typical “free market” pitch favoring capital income (and the rich) over labor income (and everybody else).

Of course, the Journal then proceeds to quote Art Laffer for the right-wing corporatist ALEC in an article claiming that a majority of new jobs are created in states without an income tax because of their lack of an income tax.
[Aside:  Laffer is (in)famous as the 'free market' economist who described his view of the maximum tax rate by drawing a bell curve on a napkin.  The Laffer Curve is more ideology than theory, as I explain in an earlier post:  CFP's Laffer Curve Video, ataxingmatter (Feb. 2008). ]

Not surprisingly, Caron’s title suggests that the “real” policy reason for the shift is a “real” desire to create jobs.

I have significant doubts.  Most of the anti-income tax proponents are pro-Big Business and pro-wealth.  A shift from an income tax to a consumption/sales tax is a move from a somewhat (often minimally) progressive tax system to an explicitly regressive tax system.  Such a move favors those with capital assets and mainly capital income.  Claims (like that made by the Civitas Institute cited in the Journal article) that shifting from income tax to sales tax will result in “average annual personal income growth” mean almost nothing since averaging income growth across a population doesn’t really tell you whether almost all of it goes to the wealthy or not–if that growth goes to those already in the wealthy distribution, then inequality increases and in fact most everybody else is worse off, in spite of the “average” growth.

The Journal acknowledges the regressive nature of a sales tax swap, but suggests that exemptions of necessities (e.g., food, medicine, utilities) and rebates for low-income families will suffice.  I also find that doubtful–the very low absolute benefit to the poor of the exemptions and/or rebates, while important, is substantially less than the very real high absolute benefit to the wealthy of the switch to a consumption rather than income tax.  Accordingly, the so-called “reform” will inevitably increase an already devastingly problematic inequality that has resulted in lower quality of life for most Americans on many different areas from literacy to access to health care to teenage pregnancy to death rates and all the many other factors in which Americans enjoy a lower level of quality of life than most other OECD nations.

Not, in other words, a good idea.  As noted in Nick Carnes (who teaches at Duke University), A Tax-Reform Plan that Rewards the Wealthy and Stalls the State, NewsObserver.com (Jan 24, 2013, modified Jan. 25, 2013), these proposals are being pushed by right-wing propaganda tanks, including a “wealthy conservative foundation [that] has paid [Arthur] Laffer to write another report and to fly to our state to  promote it.”  Id.

The goups behind these proposals have their one-size-fits-all state-level strategy down to a science, but they don’t have a handle on the actual science of state tax reform. It’s easy to see why their ideas are appealing. Who wouldn’t like to grow our economy and lower taxes without cutting vital services like schools and public safety?

However, independent economists in every state where the Laffer plan has been introduced – including North Carolina – have found serious problems with the evidence its proponents have used to back it up. No matter how low the tax rate is, businesses and wealthy people won’t relocate to a state where the schools are bad, the streets are unsafe and the infrastructure is crumbling – things that all tend to happen when taxes are cut to the levels that the Laffer plan outlines.  Id.

The Carnes article goes on to note that “Kansas, which earlier passed the Laffer bill, is now projecting $800 million annual budget deficits and has extended an emergency sales tax that should have expired years ago” while state agencies are facing a 10% across the board cut, with education expected to lose a billion dollars in state funding over the next five years.  Yet no businesses have flocked to Kansas because of the legislation.  Id.

And guess what.  It is the wealthy who would benefit if North Carolina were to carry through with enacting its own form of the “Laffer bill”.  Carnes notes that families earning $24,000 a year would pay $500 MORE in taxes under the Laffer plan, whereas wealthy families with incomes of more than $900,000 a year would pay $42,000 LESS in taxes.  Id. Shifting the tax burden from the wealthy who can easily bear it to the low-income who cannot, while at the same time cutting government support for essential public services that build a shared community is a disaster in the making.

The Wall Street Journal isn’t flummoxed by such facts (which it doesn’t even acknowledge).  The Journal article suggests that the idea (set forth in some Big Oil/Fracking states) of replacing income taxes with revenues from oil and gas extraction would be good (and maybe better than regressive sales taxes) because “it would make everyone a stakeholder” in increased drilling and fracking, thus “help[ing] to build a politicial constituency for more mining and drilling.”  Note the presupposition that supporting “more mining and more drilling” is inherently a public good! (One assumes that the Journal staff think this because Big Oil/Big Gas is Big Business, and the Journal is ALWAYS in favor of whatever Big Business wants.)

That idea strikes me as truly worrisome–we have a climate-change problem, and trying to “buy” votes to support environmental degradation at whatever cost through the swap of income taxes for some (probably minimal) increased royalties (probably also accompanied by less in the way of services, especially for the poor or for public goods like public education) is not a good idea.  Yes, probably those very people who are the poorest and most harmed by environmental degradation would tend to be able to be bought off by that swap–they would not realize that the wealthy are again getting the mountain of the share of the benefit, and they are bearing most of the burden in terms of the long-term costs of the environmental degradation as well as the long-term costs of lower public revenues spent on programs especially important to them because of their lack of a cushion of wealth (schools, public parks, fire/police, health care, etc.).

Interestingly, the Journal article notes that Alaska got rid of its income tax in the 1980s and suggests that’s been a good deal.  Of course, Alaska also gets more back from the Federal government than it gives in Federal taxes–ie, Alaskans have replaced their income tax revenues with federal handouts.

The Journal calls these plans for revamping state laws to provide substantial benefits to wealthy individuals and corporations a “rare bright spot in the current high-tax era.”  That is garbage from both sides.  We do not live in a “high-tax era.”  IN fact, we live in a low-tax era and we are already paying for that with the significant drop in state support for higher education, state support for parks and other public amenities (police and fire protection, protections for workers, fair and easy access to voting, etc.), and state support for K-12 education as well as the failure of the federal government to fund the kinds of infrastructure and education and basic research projects that could make the difference between a continuing great economy and the continuing muddle we are in after the Bush recession. 

All of those costs are borne more substantially by those in the lower-income brackets.  With the proposed “reforms”, the wealthy will be sailing through with even more wealth, able to shut out even more effectively any association with the “lower class” elements and giving even less to support schools, colleges, unemployment benefits, etc.  Meanwhile, the poor and near-poor will get much, much less (when they didn’t owe much in taxes anyway).  Not a bright spot at all.  More like class warfare.

The real reason behind these shifts is to benefit the major members of the Republican base–i.e., Big Business and the wealthy.  It has little to do with jobs…  That’s just a handy obfuscating claim to make about policy moves that substantially shift the benefits of the economic system to the rich and the burdens of the economic system to everyone else.  This is just another element of the class warfare that has been waged for the last few decades to allocate gains to the wealthy.

cross posted with ataxingmatter

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