Why Reducing Income Tax Volatility Won't Fix State Budget Woes


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Anti-tax policymakers seeking an excuse to eviscerate the progressive personal income tax sometimes assert that its alleged volatility makes budgeting harder for state lawmakers, and that this volatility leads directly to the sort of difficult spending and tax decisions lawmakers around the nation are confronting today. A recent article in The Wall Street Journal by the often-sensible Robert Frank adds (possibly inadvertently) fuel to the fire for those seeking to make this "volatility" argument, giving the clear impression that California's budgetary woes can be laid at the door of that state's excessive reliance on boom-or-bust capital gains taxes. (No-income-tax states Nevada and Florida can breathe a sigh of relief -- presumably, the ongoing bitter budget battles in those states would be even worse if either state levied an income tax of any kind.)

Yet, as a new ITEP report shows, the "income tax volatility" fears reinforced by Frank's article are misleading in a number of ways. In many states, sales taxes have plummeted as rapidly as income taxes during the recent recession, and academic research suggests that on average, state income taxes are probably not meaningfully more volatile than sales taxes over the long haul. Moreover, the same research shows that progressive income taxes are a far more sustainable and reliable funding source, over the long term, for needed public investments than the other major revenue sources available to states. Finally, the "volatility" argument is usually made in states (like California) in which rainy day funds are either unprotected or inadequately funded to begin with.
 
Read the ITEP report

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