The state tax shift

As GOP states swap income for sales taxes, can reporters stay ahead of the story?

In today’s The New York Times, Richard Stevenson takes note of an important trend in state capitols around the country: Republican governors and state legislatures are pushing to sharply alter state revenue sources, slashing or even eliminating personal and corporate income taxes while boosting sales tax revenues through higher rates or the elimination of exemptions.

Stevenson focuses on Louisiana, Nebraska, and Kansas, but the pattern is broader than that: a similar shift is being discussed in North Carolina, and according to Paul Hammel of the Omaha World-Herald, “less ambitious” schemes to reduce income taxes are being pursued in Oklahoma, Missouri, and Indiana.

The Times piece frames the debate over these proposals this way:

…[GOP governors] are focusing attention on the idea, long championed by conservatives but accepted up to a point by economists of all stripes, that the economy would be better served by focusing taxation on consumption rather than on income.

Taxing consumption has the potential to lift economic growth by encouraging more savings and investment. But the shift could also increase inequality by reducing taxes predominantly for the wealthy, who spend a smaller share of their income than middle- and lower-income people.

“The question of whether we should tax income or whether we should tax spending is really a proxy for a different debate,” said Joseph Henchman, vice president for state projects at the Tax Foundation, a conservative-leaning research organization. “Everyone agrees we’ll get more growth with consumption taxes. It’s just that some people prioritize fairness.”

That’s a fair summary, but a bit of a false dichotomy. It’s true that most consumption taxes—like the sales taxes that already support the bulk of many state budgets—are regressive. But they don’t have to be. The Cornell economist Richard Frank is a tireless advocate for a progressive consumption tax at the national level, partly on the grounds that such an approach could reduce consumption (if not wealth) inequality. And while Frank is left-of-center, another vocal supporter of progressive consumption taxes is Alan Viard of the conservative American Enterprise Institute. In fact, NPR’s Planet Money found last year that the basic concept of scrapping income taxes for a progressive consumption tax drew support from an ideologically diverse panel of economists.

These discussions tend to focus on federal tax policy, but in theory a state government could try to do something similar. Of course, the lawmakers behind these proposed tax shifts could also say, as many of these governors are, that they intend to protect lower-income households while doing nothing of the sort—and they’ll probably be able to wield a study from some think tank or advocacy group that backs up their story.

That means that there’s an important challenge for the statehouse reporters who will be on the front lines covering these debates. It’s finding a way to answer the question raised by another World-Herald story: “Who pays if Nebraska eliminates income taxes?”

In many of these states governors and top lawmakers are so far being studiously vague about their precise plans, which makes a definitive answer hard to come by. But in neighboring Kansas, Brad Cooper of The Kansas City Star got ahold of some useful figures and didn’t beat around the bush. The lead of his Jan. 18 story:

The numbers paint a stark picture of the haves and have-nots in Kansas Gov. Sam Brownback’s new tax plan.

More than a half million tax filers—earning less than $25,000 a year—will pay an average of $156 more in income taxes under the governor’s plan to overhaul the state tax code. By contrast, roughly 21,000 taxpayers—making more than $250,000 a year—will see an average cut of $5,200 a year in their tax bills.

Taxpayers somewhere in the middle, earning from $50,000 to $75,000 annually and comprised of 185,692 filers, would pay $282.90 less on average.

The calculations weren’t crafted by some liberal special interest group trying to sink the conservative Republican governor’s tax reform plan, but rather by his own Department of Revenue.

The numbers were sent Tuesday to a special Senate committee studying various tax plans. And they immediately provided ammunition for critics who think the governor wants to shift the cost of government from the affluent to the poor.

So much for trying to create a progressive tax code.

In North Carolina, Raleigh TV station WRAL—an important player in state policy coverage—took a similar approach in an interesting Jan. 24 segment. Republican Gov. Pat McCrory’s openness to an income/sales tax shift was played against criticism not just from a local left-leaning think tank, but from his own budget director, who called the proposed move “regressive”:

(A bit oddly, the segment doesn’t pause to explain that that budget director, Art Pope, is no ordinary bureaucrat: he’s a major conservative political financier who until recently sat on the board of the conservative think tank that came up with the tax plan.)

Of course, reporters can’t count on budget directors and revenue departments serving up commentary that undercuts their bosses’ talking points. And as these talks unfold at a pace set by statehouse politicians, it may be hard for reporters to keep up with each bit of incremental spin about the impact of this exemption or that credit on a particular group.

So it would be great to see some of the journalists covering this story be proactive, build a list of authoritative outside voices, and start asking right now: What would a progressive consumption tax look like at the state level? If lawmakers are serious about not simply shifting the tax burden onto poorer households, what features should the new regime have? What would the trade-offs be? Is it even possible for a state, rather than the federal government, to do this? As for who to turn to for help with these questions—I haven’t seen the name of Robert Frank, the Cornell economist, come up in any of these stories. It might be a good idea to give him a call.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Greg Marx is an associate editor at CJR. Follow him on Twitter @gregamarx. Tags: ,