Emboldened GOP wants to abolish state income taxes

Steve Schlegel, owner of Schlegel Bicy­cles, answers a ques­tion while work­ing on a bicy­cle in the store’s pro shop, Thurs­day in Okla­homa City. Schlegel said he per­son­ally would favor pay­ing less taxes, but won­dered how state ser­vices would suf­fer if a sig­nif­i­cant por­tion of state rev­enue were taken away. (Asso­ci­ated Press | Sue Ogrocki)

SEAN MURPHY

Asso­ci­ated Press

OKLAHOMA CITY — A year after Repub­li­cans swept into office across the coun­try, many have trained their sights on what has long been a fis­cal conservative’s dream: the steep reduc­tion or even out­right elim­i­na­tion of state income taxes.

The idea has cir­cu­lated among aca­d­e­mics and think-tank researchers for years. But it’s mov­ing qui­etly into main­stream polit­i­cal dis­course, despite the fact that such sweep­ing changes would almost cer­tainly mean a total rewiring of tax sys­tems at a time when most states are still strug­gling in the after­math of the recession.

“I think there’s going to be more action that way,” espe­cially as Repub­li­can gov­er­nors release their bud­get plans, said Kim Rueben, an expert on state tax­a­tion at the Brook­ings Urban Tax Pol­icy Center.

Last year, GOP law­mak­ers in many states quickly went to work on a new con­ser­v­a­tive agenda: restrict­ing abor­tion, crack­ing down on ille­gal immi­gra­tion, expand­ing gun rights and tak­ing aim at public-employee unions.

Embold­ened by that suc­cess, the party has launched income tax efforts in Idaho, Kansas, Maine, Mis­souri, Ohio, Okla­homa and South Car­olina. But it’s not clear how all those states would make up for the lost rev­enue, and Rueben said she’s not aware of any state in mod­ern his­tory that has elim­i­nated an income tax.

Nine states already get by with­out an income tax, mostly by tap­ping other sources of rev­enue. Nevada and Florida rely on sales taxes that tar­get the tourism indus­try. Alaska has taxes on nat­ural resources, and Texas imposes sub­stan­tial prop­erty taxes. The other five states are: New Hamp­shire, South Dakota, Ten­nessee, Wash­ing­ton and Wyoming.

But in the rest of the coun­try, income taxes pay for bedrock gov­ern­ment ser­vices, includ­ing roads and bridges and schools and prison systems.

In Okla­homa, Repub­li­can Gov. Mary Fallin says grad­u­ally cut­ting the top income-tax rate of 5.25 per­cent will make the state more attrac­tive to busi­nesses, help spur eco­nomic growth and ensure Okla­homa is com­pet­i­tive against neigh­bor­ing states such as Texas. Although the per­sonal income tax does not apply to cor­po­rate earn­ings, sup­port­ers say com­pany exec­u­tives and employ­ees will pre­fer to live in a state that doesn’t tax per­sonal income.

South Car­olina Gov. Nikki Haley is push­ing this year to con­sol­i­date four per­sonal income tax brack­ets and to phase out cor­po­rate income taxes. She promises to seek more tax cuts in the future.

Mis­souri has a bill to reduce income taxes and off­set the lost rev­enue by rais­ing the cig­a­rette tax.

And Maine’s GOP-controlled Leg­is­la­ture voted last year to lower the income tax from 8.5 to 7.95 per­cent, tak­ing 70,000 low-income cit­i­zens off the income-tax rolls.

Idaho Gov. C.L. “Butch” Otter has sug­gested reduc­ing the indi­vid­ual income tax rate from 7.8 per­cent to 7.6 per­cent, the same as the cor­po­rate income tax rate, and then grad­u­ally low­er­ing both to 7 per­cent. But busi­ness groups have said they would rather get help elim­i­nat­ing the per­sonal prop­erty tax busi­nesses pay on their equipment.

In Ohio, Gov. John Kasich’s 2010 cam­paign included a pledge to phase out the state’s per­sonal income tax, though with­out a timetable for doing so. Thus far, the state’s fis­cal sit­u­a­tion has stymied the governor’s efforts to achieve his goal, other than imple­ment­ing a pre­vi­ously sched­uled income tax cut.

As one way to com­pen­sate for the lost rev­enue, the Okla­homa gov­er­nor and oth­ers have sug­gested elim­i­nat­ing other kinds of tax breaks and incen­tives, specif­i­cally trans­ferrable tax cred­its offered to cer­tain busi­nesses. But that would still fall woe­fully short in Okla­homa, where the income tax pro­vides more than one-third of all state spending.

Still, 23 Repub­li­cans in the Okla­homa House have signed up as spon­sors of a mea­sure to abol­ish the income tax over the next decade with­out rais­ing any other taxes.

“Our goal is to trans­form Okla­homa into the best place to do busi­ness, the best place to live, find a qual­ity job, raise a fam­ily and retire in all of the United States. Not just bet­ter than aver­age, but the very best,” state Rep. Leslie Osborn said.

Lower taxes appeal to many vot­ers, but some won­der how the state could get by if law­mak­ers aban­don a major source of money.

“I per­son­ally would favor pay­ing less taxes, but to me, it’s like where are we going to make up the dif­fer­ence?” said Steve Schlegel, a bicy­cle shop owner in Okla­homa City. “I already feel like gov­ern­ment is under­funded at the moment.”

Roger Gar­ner, a let­ter courier, said he would accept higher prop­erty taxes if it meant elim­i­nat­ing the income tax.

“Get rid of it,” Gar­ner said. “Florida doesn’t have it. Texas doesn’t have it. We don’t need it. If some­thing is needed, we can fig­ure out a way to pay for it at the local level.”

Con­ser­v­a­tives say the lost rev­enue will be made up by increased eco­nomic activ­ity — more busi­nesses pay­ing cor­po­rate taxes and more employ­ees pay­ing prop­erty taxes and spend­ing money. But econ­o­mists warn those pre­dic­tions are unrealistic.

With­out cre­at­ing an alter­na­tive fund­ing sys­tem, “it’s clearly irre­spon­si­ble to pro­pose tak­ing action against the income tax,” said Alan Viard, an econ­o­mist with the Amer­i­can Enter­prise Insti­tute, a Wash­ing­ton, D.C.-based con­ser­v­a­tive think tank.

For­mer Okla­homa Trea­surer Scott Meacham, a Demo­c­rat who helped nego­ti­ate a series of small income tax cuts, urged state lead­ers to be care­ful tin­ker­ing with the state’s econ­omy, which is cur­rently enjoy­ing double-digit rev­enue growth and has one of the 10 low­est unem­ploy­ment rates in the country.

“If you look at our state’s econ­omy, it’s doing very well ver­sus vir­tu­ally any other state, whether they have a state income tax or not,” said Meacham, who is now a mem­ber of the board of direc­tors for the State Cham­ber, an asso­ci­a­tion of Okla­homa busi­ness and industry.

Vot­ers, he added, “ought to be very con­cerned, espe­cially in an elec­tion year, when the politi­cians are telling them they know what’s best for them from an eco­nomic standpoint.”

In neigh­bor­ing Kansas, Repub­li­can Gov. Sam Brown­back has a sweep­ing plan to over­haul income taxes that calls for off­set­ting income tax cuts by can­cel­ing a sched­uled drop in the sales tax. But it would increase the tax bur­den for the state’s poor­est house­holds. And he faces resis­tance from within his own party over con­cern that the sales tax increase was sup­posed to be a tem­po­rary fix back in 2010.

A sim­i­lar debate is unfold­ing in Okla­homa, where the plan calls for reduc­ing the income tax from 5.25 per­cent to 4.75 per­cent by elim­i­nat­ing the per­sonal exemp­tion for every house­hold mem­ber, includ­ing chil­dren, as well as the child tax credit and earned income tax credit.

An analy­sis by the Okla­homa Pol­icy Insti­tute shows those steps would raise taxes for 55 per­cent of Okla­homans, mostly low-income fam­i­lies and those with children.

“We have grave doubts about this pro­posal,” said David Blatt, direc­tor of the insti­tute. “We see stum­bling blocks in every direc­tion. You either dec­i­mate state ser­vices or shift the bur­den onto those that can least afford it.”

Posted by AP News on Jan 30 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.