A year after Republicans swept into office across the country, many have trained their sights on what has long been a fiscal conservative’s dream: the steep reduction or even outright elimination of state income taxes.
The idea has circulated among academics and think-tank researchers for years. But it’s moving quietly into mainstream political discourse, despite the fact that such sweeping changes would almost certainly mean a total rewiring of tax systems at a time when most states are still struggling in the aftermath of the recession.
“I think there’s going to be more action that way,” especially as Republican governors release their budget plans, said Kim Rueben, an expert on state taxation at the Brookings Urban Tax Policy Center.
Last year, GOP lawmakers in many states quickly went to work on a new conservative agenda: restricting abortion, cracking down on illegal immigration, expanding gun rights and taking aim at public-employee unions.
Emboldened by that success, the party has launched income tax efforts in Idaho, Kansas, Maine, Missouri, Ohio, Oklahoma and South Carolina. But it’s not clear how all those states would make up for the lost revenue, and Rueben said she’s not aware of any state in modern history that has eliminated an income tax.
Nine states already get by without an income tax, mostly by tapping other sources of revenue. Nevada and Florida rely on sales taxes that target the tourism industry. Alaska has taxes on natural resources, and Texas imposes substantial property taxes. The other five states are: New Hampshire, South Dakota, Tennessee, Washington and Wyoming.
But in the rest of the country, income taxes pay for bedrock government services, including roads and bridges and schools and prison systems.
In Oklahoma, Republican Gov. Mary Fallin says gradually cutting the top income-tax rate of 5.25 percent will make the state more attractive to businesses, help spur economic growth and ensure Oklahoma is competitive against neighboring states such as Texas. Although the personal income tax does not apply to corporate earnings, supporters say company executives and employees will prefer to live in a state that doesn’t tax personal income.
South Carolina Gov. Nikki Haley is pushing this year to consolidate four personal income tax brackets and to phase out corporate income taxes. She promises to seek more tax cuts in the future.
Missouri has a bill to reduce income taxes and offset the lost revenue by raising the cigarette tax.
And Maine’s GOP-controlled Legislature voted last year to lower the income tax from 8.5 to 7.95 percent, taking 70,000 low-income citizens off the income-tax rolls.
Idaho Gov. C.L. “Butch” Otter has suggested reducing the individual income tax rate from 7.8 percent to 7.6 percent, the same as the corporate income tax rate, and then gradually lowering both to 7 percent. But business groups have said they would rather get help eliminating the personal property tax businesses pay on their equipment.
In Ohio, Gov. John Kasich’s 2010 campaign included a pledge to phase out the state’s personal income tax, though without a timetable for doing so. Thus far, the state’s fiscal situation has stymied the governor’s efforts to achieve his goal, other than implementing a previously scheduled income tax cut.
As one way to compensate for the lost revenue, the Oklahoma governor and others have suggested eliminating other kinds of tax breaks and incentives, specifically transferrable tax credits offered to certain businesses. But that would still fall woefully short in Oklahoma, where the income tax provides more than one-third of all state spending.
Still, 23 Republicans in the Oklahoma House have signed up as sponsors of a measure to abolish the income tax over the next decade without raising any other taxes.
“Our goal is to transform Oklahoma into the best place to do business, the best place to live, find a quality job, raise a family and retire in all of the United States. Not just better than average, but the very best,” state Rep. Leslie Osborn said.
Lower taxes appeal to many voters, but some wonder how the state could get by if lawmakers abandon a major source of money.
“I personally would favor paying less taxes, but to me, it’s like where are we going to make up the difference?” said Steve Schlegel, a bicycle shop owner in Oklahoma City. “I already feel like government is underfunded at the moment.”
Roger Garner, a letter courier, said he would accept higher property taxes if it meant eliminating the income tax.
“Get rid of it,” Garner said. “Florida doesn’t have it. Texas doesn’t have it. We don’t need it. If something is needed, we can figure out a way to pay for it at the local level.”
Conservatives say the lost revenue will be made up by increased economic activity — more businesses paying corporate taxes and more employees paying property taxes and spending money. But economists warn those predictions are unrealistic.
Without creating an alternative funding system, “it’s clearly irresponsible to propose taking action against the income tax,” said Alan Viard, an economist with the American Enterprise Institute, a Washington, D.C.-based conservative think tank.
Former Oklahoma Treasurer Scott Meacham, a Democrat who helped negotiate a series of small income tax cuts, urged state leaders to be careful tinkering with the state’s economy, which is currently enjoying double-digit revenue growth and has one of the 10 lowest unemployment rates in the country.
“If you look at our state’s economy, it’s doing very well versus virtually any other state, whether they have a state income tax or not,” said Meacham, who is now a member of the board of directors for the State Chamber, an association of Oklahoma business and industry.
Voters, he added, “ought to be very concerned, especially in an election year, when the politicians are telling them they know what’s best for them from an economic standpoint.”
In neighboring Kansas, Republican Gov. Sam Brownback has a sweeping plan to overhaul income taxes that calls for offsetting income tax cuts by canceling a scheduled drop in the sales tax. But it would increase the tax burden for the state’s poorest households. And he faces resistance from within his own party over concern that the sales tax increase was supposed to be a temporary fix back in 2010.
A similar debate is unfolding in Oklahoma, where the plan calls for reducing the income tax from 5.25 percent to 4.75 percent by eliminating the personal exemption for every household member, including children, as well as the child tax credit and earned income tax credit.
An analysis by the Oklahoma Policy Institute shows those steps would raise taxes for 55 percent of Oklahomans, mostly low-income families and those with children.
“We have grave doubts about this proposal,” said David Blatt, director of the institute. “We see stumbling blocks in every direction. You either decimate state services or shift the burden onto those that can least afford it.”