Eliminating State Income Taxes Could Spur Economic Growth

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 ...
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.

Why Are States Not Increasing The Cigarette Tax?

The Centers For Disease Control Says That States are Behind In Increasing the Cigarette Tax

One of the best ways to help cut smoking is by boosting cigarette prices. However, a CDC report indicates fewer states are doing that.

15 states in 2009 raised their excise taxes, but only 8 states in both 2011 and 2010 did the same. While New Hampshire decreased it. The report states that increasing the tax reduces overall demand and helps stop teen from beginning. Only 1 in 5 teens smoke, but there is a drop-off of the decline.

The report mentions that the national tax on cigarettes is now at $1.46 per pack in 2011, up from $1.34 per pack in 2009. NY has the record with $4.35, with Missouri at the bottom with $0.17.

Joseph Califano of NCASA states that it is great that a pack of cigarettes in NY is $10.50, but he goes on to say that it should be $100.

Why are they reluctant to raise state taxes on cigarettes? Many of the states who raised cigarette taxes also increased funding for tobacco prevention programs.

Healthcare officials believe that the bad economy may have something to do with the states backing off of funding for tobacco control. Dr. McAfee does not believe this. He says that there is ample evidence that the programs and higher taxes work and that the states will recoup their investments. He says that the states are not getting the full benefit from the cigarette taxes that they could be getting.