Tuesday, January 30, 2007

Wall Street Journal -- on Abolishing State Income Taxes

The Wall Street Journal article below was sent to us by our friend Marilyn Rickert of Fair Tax Now.

She reported the following background information on the report.

The research on which the Wall Street Journal article was based was funded by Americans For Fair Taxation (FairTax). The goal was to compare the states that had income taxes and those with no income taxes to see which ones did better. As Flat Tax supporters, the team of Arduin, Laffer, & Moore was chosen to carry out this research because we felt their bias would be against the FairTax and in favor of an income tax -- yet as honest researchers they would accurately report their findings no matter the result.

Our research in IL shows that using the FairTax base, we can eliminate the state income tax and property tax at about the same sales tax rate as we have now while raising the same amount of money as our current tax system. Remember under the FairTax bill, everyone is protected up to the poverty level. Also how much you pay in taxes is always your choice.

To view the A Macroeconomic Analysis of the FairTax Proposal click here.

Incentives drive all economic behavior. Taxes are a negative incentive. From an economic efficiency perspective, the appropriate goal for tax policy is to establish a tax system that minimizes the tax disincentives on economic activities, given the revenue needs of the government.

The article below appeared in the Wall Street Journal.

Rich States, Poor States

January 25, 2007

Wall Street Journal, Page A18

If you're searching for the next big thing in American politics, it's wise to keep an eye on the states. Here's one possibility: the abolition of state income taxes.

In Georgia, Missouri and South Carolina, Governors and state legislatures are drafting serious proposals to repeal their income taxes to promote economic development. St. Louis, one of America's most distressed cities, may overturn its wage/income tax as a way to spur urban revival. And in Michigan, the legislature is in the last stages of phasing out its hated business income tax -- the most onerous in the land. "States are now in a ferocious competition to attract jobs and businesses," says economist Arthur Laffer, who is advising several Governors and legislators on the issue, "and one of the best ways to win this race is to abolish the state income tax."

The timing for fixing state tax codes could hardly be more ideal because states are swimming in budget surpluses thanks to the booming national economy. This should be a big year for state tax cuts. Governors in Arkansas, Florida and West Virginia have already announced major tax relief plans for 2007. Even New York City has a $1 billion surplus and Mayor Michael Bloomberg is promising a property tax cut.

But the biggest target is the income tax. Newly re-elected South Carolina Governor Mark Sanford is talking of reviving his plan to phase out the income tax over 18 years. Mr. Sanford ran into opposition from the legislature in his first term, but he tells us that "I still consider this one of my top priorities and if the legislature wants to do it, I would be ecstatic."

Georgia may beat Mr. Sanford to the punch. House Republicans in Atlanta have announced that one of their top priorities is to use the half-billion-dollar budget surplus as a downpayment to "dismantle the current tax code." House Republican Majority Leader Jerry Keen tells us the debate in Atlanta is between a flat-rate income tax and a plan that would "do away with the personal income tax but broaden the sales tax by eliminating 107 exemptions. We're committed to a pro-growth tax plan that announces to the country that Georgia is open for business."

In Missouri the legislature is reviewing a plan by the state think tank, the Show Me Institute, that would increase the rate of the sales tax to 7.5% and limit spending growth to population plus inflation, in return for eliminating the state's income tax over 10 years. House Speaker Carl Bearden says "I would like to see a phasing out of our current tax structure in Missouri. . . . Eliminating the income tax can have a huge positive impact on a state's economy."

The idea of financing state services without an income tax is hardly radical. Nine states today -- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming -- manage well without one. With a few exceptions, the non-income tax states are America's most prosperous. Meanwhile, the high income tax states, which tend to be congregated in the Northeast, keep surrendering jobs, people, and voters to the South and West.

State lawmakers also seem to have learned from two of the most recent states to adopt an income tax: New Jersey and Connecticut. As recently as 1965 New Jersey had neither an income nor sales tax, but managed to balance its budget every year. Now it has both taxes -- its income tax is the 5th highest in the nation -- but the state is facing what Stateline.org calls a "staggering budget deficit." Allied Van Lines reports that the Garden State is now one of the leading places for people to flee.

The latest state to adopt an income tax was Connecticut in 1991, but a new report by the Yankee Institute reveals that the tax has been a calamity. The state has ranked last in employment growth since 1991, losing 240,000 of its native born citizens between 1991-2002. No other state has since enacted an income tax, and lawmakers in Georgia, Missouri and South Carolina say Connecticut is now the model for how not to run a state economy.

Whether these states will be able to eliminate their income taxes in the next few years is an open question. But what's undeniable is that the debate in state capitals has swung decisively in the direction of chopping income tax rates, not raising them.

Quote of the day.

"A taxpayer is someone who works for the federal government but who doesn't have to take a civil service examination."
Ronald Reagan

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