The federal tax code doesn’t look like it will be reformed in Washington anytime soon, but more than a dozen states that are controlled by Republican governorships and legislatures are looking to initiate tax reforms, such as cutting or ending state income and corporate taxes.
One of the latest pushes to move ahead with these tax ideas is Louisiana Republican Governor Bobby Jindal, who called on Thursday to abolish the state’s income and corporate taxes, while pushing for sales taxes to offset the loss in revenue.
“My goal is to eliminate all personal income tax and all corporate income tax in a revenue neutral way, and keep the sales tax as low and flat as possible,” stated the Louisiana Governor in an email announcement last week. “This will keep more money in the pockets of Louisianians and send a message to businesses across the globe that Louisiana is open for business.”
Meanwhile, the North Carolina GOP is looking at executing these proposals. Last year, the income tax rate in the state of Kansas was slashed quite notably and many expect The Sunflower State to repeat its actions. Oklahoma attempted to lower its income tax rates in 2012, but it’s slated to try again this year.
Ohio Republican Governor John Kasich campaigned on ending income taxes to slowdown government spending. According to the Lancaster Eagle Gazette, Kasich will most likely decrease the income tax rate this year because the state couldn’t significantly lower the tax rate in favor of increasing severance taxes on the oil and natural gas industries.
With 37 of the 50 states maintaining one-party control – 25 Republican and 12 Democratic – many of the states can impose their agenda, like the tax theories that have been espoused recently by Americans for Tax Reform, a Washington-based anti-tax lobbying group headed by conservative activist Grover Norquist. This organization has decided to target states to establish a campaign to reform taxes.
Political opponents argue that much of the states’ revenues come from income taxes. For instance, The Buckeye State collected approximately $9 billion in fiscal year 2011 from income taxes from Ohio residents, which accounted for the largest single source of the state’s revenue. The state’s sales taxes garnered nearly $8 billion.
States would, therefore, have to revamp their tax and spending policies, which would be difficult to do for many of the politicians because of heavy influences, including the unions. Furthermore, left-wing think tanks argue eliminating the state income tax and replacing it with a sales tax would hurt the middle class and the poor, while also disturbing social programs because these same groups doubt a sales tax would generate enough revenue.
At the present time, there are several states that do not have an income tax at all: Alaska, Florida, Nevada, New Hampshire (no tax on wages), South Dakota, Tennesse (no tax on wages) Washington and Wyoming. Of the eight states, siix of them are below the national unemployment rate of 7.8 percent.
Seven states have the flat tax, an income tax system whereby everyone pays the same rate regardless of their income. These states are Colorado (4.63 percent), Illinois (three percent), Indiana (3.4 percent), Massachusetts (5.3 percent), Michigan (4.35 percent), Pennsylvania (3.07 percent) and Utah (five percent).
Nationwide, there is a growing movement to incorporate a FairTax, a proposal of abolishing all federal income taxes, capital gains taxes, corporate income taxes, payroll taxes, gift taxes, estate taxes and the alternative minimum tax (AMT) and replacing them with a single national across-the-board consumption tax on all retail transactions.
In the libertarian community, individuals like retired Texas Republican Congressman and three-time presidential candidate Ron Paul want to replace the current federal tax code with nothing at all. Dr. Paul, a bestselling author, has also come out against the FairTax by reiterating the stances that it would hurt the poor and middle class. Although he opposes it, he would vote for it because it’s a good alternative to the status quo.
Nobel laureate Milton Friedman suggested the United States employ a negative income tax (NIT), an income tax system where citizens earning below a set level of pay would receive supplemental pay from the federal government instead of paying taxes to the entity. Essentially, people earning less than the specified level would owe no taxes, people earning at the level would receive a payment of a proportion to the shortfall and people earning above the threshold would pay a portion of their income above that level.
Friedman usually prefaced his remarks with saying that he didn’t believe this was the ideal tax system, but it was surely an improvement from the present system of taxing.
Here is Friedman’s explanation of the NIT:
“Under present law we have a positive Income Tax that everybody knows about, particularly now, a couple weeks after they’ve paid their income taxes. And under the Positive Income Tax if you happen to be the head of a family of four, for example, and you have $3,000 of income, you neither pay a tax nor receive any benefit from it. You’re just on the break-even point. Suppose you have an income of $4,000. Then you have $1,000 of positive taxable income, on which at current rates (14%) you pay $140.00 in tax. Suppose today you had an income of $2,000. Well then you’re entitled to deductions and exemptions of $3,000, you have an income of $2,000. You have a negative income taxable income -$1,000. But currently under present law you get no benefit of those unused deductions. The idea of a Negative Income Tax is that, when your income is below the break-even point, you would get a fraction of it as a payment “from” the government. You would receive the funds instead of paying them.”