Spent the day in lovely North Carolina where the legislature is contemplating some very bad tax policy. There’s this scourge across the land where a number of states are cutting their income taxes and raising their sales taxes. Bad idea.
First off, you’re shifting your revenue collection from a progressive to a highly regressive source of taxation. Such a shift is unmistakable in the figures below, showing effective tax rates—taxes/income—by income level for North Carolina sales and income taxes. Since low-income households consume much more of their income than high-income families (and since sales taxes are rarely graduated) that graph is a downward staircase, with the liability concentrated at the low end.
Income taxes in NC, on the other hand, are relatively progressive. In fact, that upward staircase is pretty much a mirror image of the sales tax graph.
So what’s the rationale for the shift? It’s the same old trickle-down nonsense that you might be thinking should have left the national stage with Mitt Romney. The consultants who flit about the land trying to get states to swallow this stuff argue that it will unleash entrepreneurs and job creation. Not surprisingly, they remain impervious to evidence, including analysis like this or this (the first link contains the citations I mentioned in my talk). Or the Bush years…whatever.
It’s also difficult to maintain revenue neutrality under the weight of this shift—income grows faster than sales over the longer run—and, in fact, here in NC a Republican state senator proposed such a plan this very day that immediately starts losing revenue.
The thing I tried to explain to my audience down here thus went like this:
…it is far too easy for these debates to be cast wholly in terms of “taxes bad…therefore, tax cuts good.” I’d say those few words pretty much sum up the substance of this debate for the last few decades, not to mention a lucrative career for the lobbyist Grover Norquist.
But unless you believe schools and universities are bad, and police and firefighters are bad, and libraries and roads and bridges and water systems and early childhood learning and hiking the trails over at Eno River or the beaches of the Outer Banks…unless you think they’re bad too, then I strongly suggest that the first question—the very first thought—you have when someone comes to you with their great big tax cut idea, is: how are we going to make up the lost revenue and which groups are going to be hit by the shift in tax burden?
NC has long been committed to solid education from early childhood interventions through their jewel-in-the-crown system of higher ed, along with maintaining some beautiful natural resources. The idea that they’ll seduce businesses to come to the state by shifting taxes from income to sales, while continuing a trend toward disinvestment in public goods like higher ed, natural resources, and infrastructure is exactly backwards.
Again, facts don’t drive these debates but given the potential tradeoff here—supporting vital public goods versus tax cuts for the wealthy paid for by tax increases on the poor—my colleagues and I will continue to put them in front of anyone who asks.
Source: ITEP, Who Pays? 4th Edition