Thursday, February 9, 2012

Politics and Economics ... Why Some States Want to Cut Taxes While Others, Including President Obama, Want to Raise Them

Many individual states are considering reducing and even eliminating state income taxes.

Others are following President Obama's lead (see Budget Plan Has Familiar Ring) in attempting to raise income taxes on the "wealthy" as defined from time to time.

We'll begin with Maryland's Son of Obama which endorses the President's approach by advocating higher taxes for that state's high earners. The Maryland rich are now defined as including the "thousandaires," or those making more than $100,000 annually. Here goes:

"Most states have improved their financial condition coming out of the recession and so new taxes are generally off the table this year. Then there's Maryland. Here's another case of a failed tax increase on "millionaires."

Democratic Governor Martin O'Malley has acknowledged another $1.1 billion deficit for 2013 thanks to a $35.9 billion budget with about $400 million for new school construction, roads and transit. To close the budget gap and help plug a $16 billion unfunded liability in public-employee pensions, Mr. O'Malley is seeking to raise $180 million by reducing income-tax deductions and exemptions for those earning more than $100,000. This is Maryland's new definition of "rich."

Mr. O'Malley also wants to raise taxes on tobacco, nursing homes, Internet sales, water and sewers. One of his biggest revenue grabs is a proposal to apply the 6% state sales tax to gasoline, which over three years could raise the tax by 18 to 24 cents a gallon, up from 23.5 cents now."

Similar to Maryland's approach, President Obama's upcoming budget proposal calls for higher taxes on the rich as well:

"President Barack Obama will release his budget plan next week, calling for $3 trillion in deficit reductions over 10 years, including $1.5 trillion in tax increases to fall mostly on the wealthiest Americans."

Now let's look quickly at the other side of the taxation issue. Many individual states are going in the exact opposite direction of Maryland and the President by considering the reduction and even elimination of their state income taxes? But why?

Well, they're encouraging job creation and making a solid effort to achieve strong economic growth for their citizens. When coupled with the rising trend toward right-to-work legislation, the tide at the state level is turning in favor of enlightened policies about job creation and the negative effects of taxation on an economy's growth.

The Heartland Tax Rebellion puts it this way:

"The tax burden isn't the only factor that determines investment flows and growth. But it is a major signal about how a state treats business, investment and risk-taking. States like New York, California, Illinois and Maryland that have high and rising tax rates also tend to be those that have growing welfare states, heavy regulation, dominant public unions, and budgets that are subject to boom and bust because they rely so heavily on a relatively few rich taxpayers.

The tax competition in America's heartland is an encouraging sign that at least some U.S. politicians understand that they can't take prosperity for granted. It must be nurtured with good policy, as they compete for jobs and investment with other states and the rest of the world.

"Our goal is for our economy to look more like Texas, and a lot less like California," says Mr. Brownback, the Kansas Governor. It's the right goal."

Here's a brief sampling of what various states are doing:

"Oklahoma Governor Mary Fallin is starting to feel surrounded. On her state's southern border, Texas has no income tax. Now two of its other neighbors, Missouri and Kansas, are considering plans to cut and eventually abolish their income taxes. "Oklahoma doesn't want to end up an income-tax sandwich," she quips.

On Monday she announced her new tax plan, which calls for lowering the state income-tax rate to 3.5% next year from 5.25%, and an ambition to phase out the income tax over 10 years. "We're going to have the most pro-growth tax system in the region," she says.

She's going to have competition. In Kansas, Republican Governor Sam Brownback is also proposing to cut income taxes this year to 4.9% from 6.45%, offset by a slight increase in the sales tax rate and a broadening of the tax base. He also wants a 10-year phase out. In Missouri, a voter initiative that is expected to qualify for the November ballot would abolish the income tax and shift toward greater reliance on sales taxes.

South Carolina Governor Nikki Haley wants to abolish her state's corporate income tax. And in the Midwest, Congressman Mike Pence, who is the front-runner to be the next Republican nominee for Governor, is exploring a plan to reform Indiana's income tax with much lower rates. That policy coupled with the passage last week of a right-to-work law would help Indiana attract more jobs and investment.

That's not all: Idaho, Maine, Nebraska, New Jersey and Ohio are debating income-tax cuts this year.

But it is Oklahoma that may have the best chance in the near term at income-tax abolition. The energy state is rich with oil and gas revenues that have produced a budget surplus and one of the lowest unemployment rates, at 6.1%. Alaska was the last state to abolish its income tax, in 1980, and it used energy production levies to replace the revenue. Ms. Fallin trimmed Oklahoma's income-tax rate last year to 5.25% from 5.5%.

. . . . The American Legislative Exchange Council tracks growth in the economy and employment of states and finds that those without an income tax do better on average than do high-tax states. The nearby table compares the data for the nine states with no personal income tax with that of the nine states with the highest personal income-tax rates. It's not a close contest."

So we have a simple and relatively easy comparison to consider about the desirability of higher or lower income taxation.

If it's partisan Democratic politics that's involved, and divisive class warfare is in play, the "progressive" proposal is to increase income taxes on the rich, however rich may be defined from time to time. Such as the Maryland thousandaires, and President Obama's millionaires and billionaires.

But if it's straightforward economics, job creation and general prosperity that's the issue, the approach being taken by many states is to tax income as little as possible, if at all, in an attempt to create as many jobs and as much economic prosperity as possible for their citizens.

It's really just that simple.

Thanks. Bob.

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