Eliminating State Income Taxes Could Spur Economic Growth

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Eliminating State Income Taxes

While Washington continues to struggle with attempts at major changes to the federal tax system, individual states have no such problem.  Many states in the South and Midwest that have single-party legislatures and are Republican-controlled are seeking to do away with the tax filing of state income taxes in favor of higher and more diverse sales taxes.

With 37 of the 50 states having single-party control of the legislature and governorship, seemingly radical projects such as tax reform can be handled much easier than in states that struggle with the need for a middle ground between parties.  Of those 37 states, 25 are Republican-controlled, and it is primarily these states that are considering doing away with the tax filing of income taxes  and replacing the lost  revenue with higher sales tax and sales tax on previously untaxed items such as food and luxury services.

This image depicts the total tax revenue (not adjusted for inflation) for the U.S. federal government from 1980 to 2009 compared to the amount of revenue coming from individual income taxes. The data comes from the Office of Management and Budget’s record of the ‘Budget of the US Government FY 2011′, specifically the ‘Historical Tables, Table 2.1.’ The information is also here. (Photo credit: Wikipedia)

Much of this shift being considered is not grounded in new ideas, but rather comes partly from the idea of trickle down or supply chain economics, popular during Reagan’s presidency and still somewhat popular with Republicans today.  Critics of the move from income taxes to higher sales taxes are concerned that the shift will place too much of a burden on the poor and middle-class.  However, proponents point out that placing sales tax on services would also tax higher income groups as well.

Proponents of this idea also state that eliminating income taxes at the state level would spur economic growth for everyone.  In addition, it has been proposed that states with lower income tax burdens continually outperform higher tax states.  However, other studies have claimed to show that the opposite is true, using the relative economic strength of higher tax states like New York as an example.


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