Heartland call on ‘State Tax Reform’ dovetails with Quinn’s budget address

March 10, 2013

ThornerBy Nancy Thorner –


The Heartland Institute’s Emerging Issues Conference Call for March, as part of its Emerging Issues Conference Call Series, took place on Wednesday, March 6. The topic: “State Tax Reform for 2013”

A number of states, including Louisiana, Kansas, Nebraska, North Carolina, and Wisconsin, are looking at their tax systems to make them simpler, fairer and more conducive to economic growth.

Regarding Income taxes, they are now being viewed by many as more damaging to individuals than a consumption tax. Why? Because income taxes take money away that never had a chance to be used, leaving individuals with less disposable income. In regard to businesses, quarterly payments are required which ties up money that might otherwise be put to better use.  A consumption tax, on the other hand, requires that taxes are paid only when money is spent.

The nine states that don’t have a state income taxes have out performed those who do by adding $150 billion of wealth to their states:  Alaska, Florida, Nevada, South Dakota, Texas, Washington, New Hampshire and Tennessee.

Among the nine states losing population and jobs during the same period — and with it went $100 billion in wealth — were those states with the highest income tax burdens. These states are likely to lose more population in relationship to the rest of the nation, as more of their population moves to states like Florida, Texas, and Tennessee where they can find jobs or go into retirement without paying a state income tax.

Competition does exists among the states.  States who are winning are gaining in population and experiencing an expanded tax base, doing so despite not having a state income tax.  Louisiana and North Carolina, both border states, are competing with Texas and Tennessee, respectively, where there is no state income tax.

Noted was how states that rely on an income tax do well when the economy is recovering or when times are good, but not during a down economic period.

The merits of a having a state income tax vs a consumption tax was discussed at some length.

Academic literature is clear that over the long term states that control spending and have a low tax burden will outperform those states with a high tax burden and those who depend on a state income tax.  Other studies document that corporate and personal income taxes on capital are more damaging than a consumption tax.

As far as replacing a state’s income tax with a consumption tax, it really isn’t necessary to do so if caps are placed on the rate of spending.

The purpose of any tax should be to fund “necessary” services, but so often an income tax is viewed as a social engineering tool.

State income taxes require an army of individuals, including lawyers, to deal with the massive array of rules and regulations which make up the tax code.  Also involved is much paper work on the part of the filer.

Consumption taxes don’t require that paper work be filed with a government agency.  This eliminates the invasion of individual  privacy that occurs when filing an income tax return.  Instead, the consumer buys and the tax is collected and sent to the government.

A question posed to Steve Stanek dealt with the unfairness of the consumption tax among lower income voters who are likely to spend more of their disposable dollars on goods than wealthier individuals, thereby paying a larger share of taxes, relative to their income, under a consumption tax.

Steve Stanek countered by relating that states who have in place a consumption tax have out performed states who do not,  despite concern over how low income residents might be affected.  The best present for poor people are jobs, and added growth brings jobs.

A consumption tax can be set up so that items such as food, medicine, and basic clothing are taxed much less than other purchased items or at a zero rate.  Stanek also pointed out that most people do not stay poor forever.

Every type of tax has it disadvantages, but no matter what is done to reform taxes, people with capital will always find a way to have it taxed less or not at all.  People with money have lots of options that most people do not have.  They can easily move both themselves and their money.

In Illinois sending is driving taxes.  Illinois as the most fiscally damaged state in the nation, not only has the lowest credit rating, but is also viewed as a basket case by outsiders.

In a deal made during the Lame Duck session in 2011, designated as a temporary raise, the personal income tax was raised 67 percent, from a 3 percentage-point rate to a 5-percentage point.  The corporate tax was raised 46 percent.  These tax increases are bringing in an additional $7 billion a year to the state government.  Another way to put it:  These tax increases are taking another $7 billion a year from businesses and individuals in Illinois.

Despite the higher personal and corporate income taxes, Illinois still owes $9 billion in late payment to vendors.  Illinois is in worse shape than it was before the tax rates were raised in 2011.   At the same time Illinois continues to fund many unnecessary and redundant programs aimed at garnering votes.

Needless to say is that Illinois has gone in the opposite direction from states who are trying to get their financial house in order. In Illinois it has to do with the big divide between how people think in rural areas relative to those living in towns.

Governor Quinn was described by Steve Stanek as a left-wing, populist governor of low merit, yet he won the governorship in Illinois even though he lost in 98 of the102 counties that make up the state.  Quinn’s victory resulted from the overwhelming majority of individuals who voted for him in the Chicago and East St. Louis area.  In Minnesota  vote counts center around those living in the Minneapolis area and in university towns.  Even in California most of the counties vote Republican.  It is the voters living in the heavy population centers of San Francisco, Los Angeles, and San Diego who vote for higher tax rates and government spending.

Illinois used to have 21 congressional districts.  Now the number has been reduced to 18.   As a high tax state, Illinois, like New York and California, is losing population to the rest of the country.

Lastly Steve Stanek advised that although good tax reform is good, run away spending will negate it.  A state that does not control spending could end its income tax and become more growth-oriented and still wind up in budget trouble.  Before long people would start blaming the end of the income tax for the problem when in reality the cause of the problem is too much spending.  It does create a situation where tax revenues go up, but spending goes up more, so lawmakers start arguing even higher taxes are needed.

That’s what happening in Illinois, as we hear some lawmakers already declaring the “temporary” tax increases should be made permanent.

Saturday, March 09, 2013 at 03:21 PM | Permalink



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