4:51pm

Thu February 21, 2013
Governing

The Travails Of Cutting State Taxes

Originally published on Fri February 22, 2013 10:26 am

Transcript

MELISSA BLOCK, HOST:

This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

And we begin this hour with a policy move in many states that goes right to your wallet. Many governors are moving to overhaul their tax codes. And at least a dozen Republicans want to reduce or eliminate their state's income tax. In some cases, sales taxes could go up instead. NPR's David Schaper has our report.

DAVID SCHAPER, BYLINE: Standing in the very same spot at the state capitol chamber where his budget proposal two years ago sparked massive protests, Wisconsin Governor Scott Walker, last night, delivered some good news to taxpayers. There's a budget surplus.

GOVERNOR SCOTT WALKER: With this in mind, I am pleased to announce an income tax cut of $343 million.

(APPLAUSE)

SCHAPER: And Walker is far from being the only Republican governor calling for a tax cut this year. Here's newly elected Indiana Governor Mike Pence at recent Chamber of Commerce meeting in Gary, pushing his plan to cut income tax rates 10 percent across the board.

GOVERNOR MIKE PENCE: I think the time has come for us to lower taxes on job creators and small business owners and family farmers and lowering personal income tax is just the way to do that.

SCHAPER: It sounds like these governors might be trying to outdo each other when it comes to cutting taxes. Pence notes that Governor John Kasich in bordering Ohio wants to cut income taxes by 20 percent. And there are tax cut proposals in Oklahoma, South Carolina, North Dakota, Missouri and Virginia too. Republican governors in Louisiana, Nebraska and North Carolina are looking to eliminate their state's income taxes altogether and replace them by broadening the sales tax. Scott Drenkard is an economist who studies state tax policy for the nonpartisan Tax Foundation.

SCOTT DRENKARD: It's turning what's normally not a very exciting topic into kind of a sexy one this year.

SCHAPER: Tax policy is sexy? Well, after years of cutting spending and, in some cases, raising taxes, Drenkard says for many states, things are looking up.

DRENKARD: I think now there's a renewed desire to revisit the tax code, look at the structure, broaden the bases, lower the rates and come up with something that promotes economic growth.

SCHAPER: And Drenkard says his studies show that higher income taxes hurt growth more than higher sales and property taxes. In most states, sales taxes apply only to goods, not services. So broadening the sales tax, the theory goes, to include services, such as haircuts and car repairs, could raise enough money to offset the loss of income tax revenue.

But other economists, such as Tracy Gordon at the Brookings Institution, say that broadening the sales tax could pose a risk.

TRACY GORDON: The argument you hear on the other side is that increasing sales taxes disproportionately affects low income people and that's because those people tend to devote more of their budgets to consumption.

SCHAPER: And Gordon says it's not just lower taxes that spurs economic growth.

GORDON: Regulation, quality of life, the availability of an educated labor force, so it's a complicated decision. And in particular, we have to remember that taxes go to fund services that people want.

SCHAPER: Services such as health care, roads and schools. And that's one of the concerns of some of the Republican lawmakers in states where governors are pushing tax cuts. Here's Wisconsin state Senator Luther Olsen.

STATE SENATOR LUTHER OLSEN: I've got to believe that folks in this state, rather than getting $2 a week tax cut, would rather see their schools get something rather than no increase for students whatsoever.

SCHAPER: And in Indiana, GOP House Speaker Bosma has a broader budget concern based on past tax cuts.

STATE REPRESENTATIVE BRIAN BOSMA: Having been here in '98, the last time we had a $2 billion surplus and then, through tax cuts, found ourselves with $1.4 billion deficit just six years later, so sustainability is important.

SCHAPER: So while there's little political downside to proposing a big tax, for a governor to get that through the legislature often requires significant heavy lifting. David Schaper, NPR News. Transcript provided by NPR, Copyright NPR.