Ted Boettner: Abolishing Personal Income Tax is a Poor Strategy
Charleston Daily Mail - As West Virginia lawmakers ponder getting rid of the state income tax, they would be wise to heed the recent experience of Kansas and an older exercise in tax cutting in our state. Neither turned out well for the people of Kansas or West Virginia. Read
The idea of abolishing the personal income tax has been making its way around state capitols over the last several years. West Virginia’s Joint Select Committee on Tax Reform, which is co-chaired by the House and Senate finance chairs, plans to make that one of its top priorities.
It’s an idea being promoted heavily by Arthur Laffer and the American Legislative Exchange Council (ALEC), which is primarily financed by large corporations and wealthy donors who want lower taxes.
Laffer is best known for championing trickle-down or supple-side economics and is the brains behind the “Laffer Curve,” a tax cutting plan sketched out on the back of a napkin. George H.W. Bush called it “voodoo economics.”
In essence, Laffer claimed if we give income tax cuts to the wealthy ‘‘job creators’’ this will create so much economic activity and jobs that the tax cuts will magically pay for themselves. This is also often referred to as “growing the tax base” in West Virginia parlance.
Perhaps the best example of ALEC’s tax plan strategy in practice is Kansas.
In 2012, at the behest of Laffer and other supply-siders, Gov. Brownback enacted the largest state personal income tax cut in history. Brownback predicted that the cuts would put “ a shot of adrenaline into the heart of the Kansas economy.”
What happened was quite different.
The tax cuts – which mostly benefited the wealthy and actually raised taxes on low-income Kansans – led to huge budget deficits, less job and income growth compared to neighboring states and the nation, massive cuts in education and other vital services, and a depleted Rainy Day Fund.
The tax cuts also led credit rating agencies to downgrade the state’s bond rating, which makes borrowing more expensive.
Not exactly what you would call fiscal conservatism.
West Virginia had a similar experience with large business tax cuts in 2007 and 2008 that cost the state over $225 million this year.
Despite promises that the tax cuts would pay for themselves and grow jobs, there haven’t been any measurable benefits, only large holes in our budget year after year and huge increases in college tuition in the wake of higher education funding cuts. In fact, we have over 7,000 fewer private-sector jobs today than when these tax cuts were put in place.
At $1.7 billion, the personal income tax is over 40 percent of the state’s general revenue fund budget. You would have to more than double the state’s sales tax to replace it.
The personal income tax is also a progressive. This means higher income people – who have benefited the most during the current economic recovery -- pay a larger share of their income in personal income taxes compared to lower- and middle-income families. The sales tax is just the opposite, hitting low- and middle-income families harder.
Repealing the personal income tax could not only deprive the state of the resources it needs to make smart investments in our people and communities. It would increase income inequality – which robs middle- and low-income families of opportunities to get ahead and hurts economic growth -- by making our state and local tax system more upside down.
Instead of giving out large tax cuts that primarily benefit those at the top of the income ladder at the expense of the broad public, lawmakers should focus on changes that will grow the middle class, not keep it down.
This could include enacting a state Earned Income Tax Credit for working families that is refundable – meaning you get the full amount no matter the size of your tax bill -- and making much-needed investments in higher education, broadband, workforce development and our transportation system.
That’s a recipe for shared prosperity.