D. Dowd Muska


Can State Income Taxes Be Slain?

September 15, 2011

It hasn’t been done for 31 years. And a cynic would say that it can’t be accomplished again anytime soon.

Odds notwithstanding, liberty-lovers from Long Beach to Long Island should have a good thought for Governor Sam Brownback’s proposal to dump his state’s income tax. The former member of the U.S. Senate has requested a plan to dramatically restructure the way Kansas raises revenue. Steve Anderson, Brownback’s budget chief, believes that it’s “important … to get [the income tax] down to that point that you’re at the lowest rate you can be, hopefully zero.”

Writing in The Wichita Eagle, the Kansas Policy Institute’s Dave Trabert argued that the Sunshine State “is facing an employment problem of epic proportions. In the recession before the latest one, it took 32 months for private-sector employment to hit bottom; we lost 46,200 jobs and it took almost six years to return to the previous peak. This time, we lost 90,400 jobs over 34 months, and recovery will be much slower unless we take dramatic action.” Vanishing residents is another crisis -- between 2000 and 2010, 77 of Kansas’s 105 counties lost population.

An income tax phase-out passed the Kansas House this year, but was blocked by “moderate” (read: pro-Big Government) Republicans in the Senate. The story was similar in the GOP-run Louisiana legislature, where a gradual income-tax repeal secured the backing of one chamber in 2011.

The income tax has a high-profile enemy in Kentucky, where gubernatorial candidate David Williams promises that if elected, he will form “a commission of economic and tax experts to come up with a new state and local tax system. The commission will be instructed to eliminate both personal and corporate income taxes (productivity taxes), and that the number one priority is to make Kentucky the best state in the nation to create and retain jobs.”

What’s behind the desire to kill a levy that elites consider sacrosanct? Governor Rick Perry’s run for the White House has brought Texas’s spectacular success to the nation’s attention. But decades of data have shown that the income-tax-free Lone Star State has company. As The Wall Street Journal’s editorial page observed a few years before the Great Recession struck, “Since 1990 the nine states without income taxes have enjoyed twice the rate of job growth and 2.5 times the population growth of the highest income tax states.”

In addition to sapping economic vigor, an income tax provides a useful weapon to redistributionists. Rates that were once low, even flat, begin to rise, with higher assessments targeted at “the rich.” But there’s a cost to envy-based tax policy. In 2009, The (Newark) Star Ledger’s Paul Mulshine noted that New Jersey’s income tax “is now heavily weighted toward the wealthy. The top 1 percent of taxpayers, a mere 40,000 filers, generate 40 percent of the revenue. So when the economy craters … revenues plummet.” Volatility is also a problem in California, New York, and Connecticut.

Speaking of the Nutmeg State, it recently marked the 20th anniversary of the expansion of its “unearned” income tax to all types of income. In 1991, The New York Times called passage of the new levy “a striking advance.” Connecticut would be a trailblazer, claimed Federation of Tax Administrators Executive Director Harley T. Duncan: “I would not be surprised to see three or four other states adopt a personal income tax, not this year but certainly over the next several years. The most likely prospects are Texas, Tennessee and New Hampshire, and possibly also South Dakota.”

Fortunately, no state was stupid enough to copy Connecticut’s colossal blunder. By enacting a broad-based income tax, The Land of Steady Habits surrendered its special status. Already crushed by a brutal recession, the imposition of a tax on personal income spurred more residents (particularly young adults) to flee, and employers accelerated their abandonment of the state. Between 1991 and 2010, job growth in Connecticut was a miserable 3.3 percent. For the same period before the introduction of the income tax, employment surged by 30.8 percent. Now a deep-blue state where public-employee unions rule and government expenditures are indescribably imprudent, Connecticut’s wealth, relative to the nation, is in rapid decline.

Alaska was the last state to repeal its income tax. And the levy wasn’t jettisoned for economic or limited-government reasons -- a gusher of petroleum revenue prompted legislators to ax the tax in 1980.

Yet tough economic times often effect salutary, and sweeping, policy shifts. Kansas might be the next to crack. Go for it, Jayhawkers.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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