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.

The Fiscal Cliff Fact Check

Checking the facts on President Obama and the ‘fiscal cliff’ deal.

There are some important facts which President Obama fails to mention in a Web video concerning the fiscal deal that leave the wrong impression concerning its impact on both the deficit and the taxpayers:

The president tells everyone that “middle-class families” Re not going to have to pay anywhere up to $2000 in additional taxes this coming year. This is certainly true in regard to income taxes however Obama fails to also tell the public about a payroll tax cut expiring. That expiration means that approximately 77% of all taxpayers are going to be paying more taxes this year. That number includes those who earn between $75000 and %100,000 who will be paying up to $1200 additional. This will come as quite a shock to this group who fit well in the broad definition of middle class which the president consistently uses.

President Barack Obama at the Fiscal Responsib...
President Barack Obama at the Fiscal Responsibility Summit. (Photo credit: Wikipedia)

President Obama also tells the public that this agreement will “reduce the deficit”. The truth is that over the next ten years approximately four trillion dollars will be added to that deficit due to Bush tax cut extensions for all but the top one=percent of taxpayers. This deal will actually ‘reduce the deficit’ if it is compared to what it would have been had the Bush tax cuts been extended for every single taxpayer.

The fact of the matter is that all of the president’s comments on the fiscal-cliff dealings  may leave the impression that most people will be paying the same taxes as last year. This however is just not correct. The president leaves out the fact that a two year Social Security payroll tax deduction was permitted to expire resulting in people paying more this year in taxes.

Fiscal Cliff Deal – 77 Percent Of All Americans Set To Pay More Taxes

Fiscal Cliff Deal

The President has claimed that the Tuesday night fiscal cliff deal will reduce middle class taxes in America. However, taxes for most Americans will increase in 2013. The tax relief that has been built into the package will add nearly $4 trillion per year for the next 10 years to the existing $16 trillion debt. The fiscal cliff deal passed by the Senate and the Congress will not stop the Social Security payroll tax cut from expiring. This means that more than 75 percent of American households will face a higher federal tax liability in 2013.

President Barack Obama signs the executive ord...
President Barack Obama signs the executive order creating the Middle Class Task Force at the White House. (Photo credit: Wikipedia)

Tax Policy Center’s analysis indicates that families with annual income between $40,000 and $50,000 will have to pay $579 extra middle class taxes in 2013. For those earning between $50,000 and $75,000, the liability will increase by $822. Individuals earning more will have to shell out higher taxes. The Bush era tax rates for individuals earning less than $400,000 and couples earning less than $450,000 have been extended. Those earning more will pay tax at a higher rate.

The highest tax rate will increase from 35 percent to 39.6 percent. Those who fall in the highest tax bracket will have to pay a higher rate of investment taxes at 20 percent. Obama’s health care law could also increase the tax outflow of high income families. Investments of individuals earning more than $200,000 per year and couples earning more than $230,000 per year will attract a new 3.8 percent tax.

According to Tax Policy Center, families with annual income between $500,000 and $1 million will have to pay $14,812 extra tax in 2013. Those earning more than $1 million will have to shell out an additional $170,341. Obama tried very hard to include the payroll tax cut for 2011 and wanted to extend it through 2012. However, Democrats and Republicans were not keen and both agreed to let the cut expire.

Wages as high as $113,700 pay a 12.4 percent Social Security tax. Employers pay half and workers pay the other half. The latter’s share was cut from 6.2 percent to 4.2 percent for 2011 and 2012. This will result in middle class taxes savings of about $1000 a year.

The fiscal cliff Congressional battles have just begun. Over the next few weeks, fiscal cliff agreements relating to debt ceiling and automatic spending cuts affecting the Pentagon will be hammered out. Democrats will continue to push for tax hikes while Republicans will demand spending cuts and entitlement reforms.