It’s not hard to sell tax cuts. Who among us would turn down extra money in our pockets by way of fewer taxes?
But state lawmakers do us all a gross disservice when they tout tax cuts to serve their political goals but fail to address the consequences or talk about who will really benefit. The adverse after-effects are often many and disproportionately fall on low- and middle-income taxpayers. This is why the trend to push for tax cuts, in some cases on top of cuts recently enacted, is worrisome. States cannot continually cut taxes and adequately pay for services that the public overwhelming wants. And it is not fair to pay for cuts to more progressive personal and corporate income taxes by heaping more taxes on those least able to pay.
Currently, lawmakers in more than 20 states are considering major tax proposals (See an ITEP summary of most proposals here and here). Much has been made about the fact that many conservative state lawmakers are considering hiking taxes this year, but with very few exceptions, these lawmakers plan to use the revenue gained from increasing one tax to cut or eliminate another. While a handful of these tax shift proposals have provisions that would benefit working people, the vast majority would deliver the greatest benefit to wealthy taxpayers and profitable corporations, thus making state tax systems more regressive than they already are.
In Ohio, for example, Gov. Kasich has proposed further slashing personal income taxes across the board, which on the surface may sound like it will benefit all taxpayers. However, the governor’s plan recoups most of the lost revenue by raising the sales tax a full half a percent and expanding the tax to more services. The problem with this, of course, is that sales taxes are inherently regressive, which means the plan actually increases taxes on those least able to pay. An ITEP analysis of the Governor’s plan found that the top one percent of Ohio taxpayers would receive an average tax break of close to $12,000 while the average taxpayers in the bottom 60 percent would actually see their taxes go up by more than $100.
Other proposals out right cut taxes without any plans to replace the lost revenue. In North Carolina, Senate members have recently put forward a plan to slash personal and corporate income taxes which would cost the state well more than $1 billion a year, despite the fact that the state faces a $300 million budget deficit. The proposal would be the second billion-dollar tax cut in as many years. Texas lawmakers are getting closer to finalizing a more than $4 billion tax cut package that would reduce property and business taxes.
The Cost of Tax Cuts
The problem with state politicians' dogged pursuit of tax cuts is that they don’t come without a cost. Public services such as education, public health and safety, infrastructure, etc. either must be pared back or paid for using some other source of revenue.
ITEP along with many academics and news outlets have written extensively about the Kansas experiment. Gov. Sam Brownback promised Kansans that his top-heavy tax cuts would pay for themselves by stimulating economic growth. Widely derided three years ago, that claim has proven to be untrue and now the state is scrambling to make up lost revenue. Gov. Brownback has proposed increasing (regressive) alcohol and tobacco taxes to help partially plug a growing budget gap and House and Senate members have floated other largely regressive tax hikes. Further, the state has had to reduce funding to schools, higher education and social services. The proposed tax increases will undoubtedly hit low- and middle-income more as will the cuts in vital services that promote broader access to opportunity.
Tax cuts simply don’t work as an engine of economic growth, and it is time for governors and state legislators to stop peddling their plans as such. The truth about state tax systems is that each of them takes a greater share of income from their very poorest residents than their richest residents. The majority of pending tax cut and tax shift plans on the table would exacerbate this nationwide problem.
There is a right, progressive way for policymakers to approach tax policy. Last year, the District of Columbia broadened its sales tax base to include more services and made permanent a higher tax rate for the wealthiest residents. At the same time, it lowered taxes for middle-income earners and strengthened the Earned Income Tax Credit to put more money in the pockets of working people. Given that every state tax system requires more of its lowest-income residents than the rich, the right approach to tax reform is to focus on measures that would make corporations and the wealthy, those most able, pay their fair share.