Some governors talk of ditching their income tax

1-25-13

Tonight I participated in a HuffingtonPost Live session* on the calls by some governors to end their income tax. For example, Louisiana Governor Jindal has called for such a change (see Reuters article of 1/10/13 by Finn and NYT article of 1/24/13 by Stevenson).

This is a drastic move. Certain more drastic than a few states ending or greatly diminishing their car taxes a few years ago.  The income tax brings in a fair amount of revenue. Per data from the Federation of Tax Administrators, in 2011, Louisiana received 27% of its revenue from the individual income tax, 2% from the corporate income ta and 32% from the sales tax. To make up that revenue, it would seem that they almost need to double their sales tax. They also would increase the volatility of revenue. With a mix of revenues, states are better able to keep a somewhat stable base regardless of economic changes.

The sales tax is also regressive. That is, it represents a larger portion of a low-income person's income than it does for a higher income person. Also, most states have a narrow sales tax base that only covers tangible personal property even though today, more personal consumption consists of services, entertainment and digital goods.

Why not look at repealing their corporate income tax? Why should Louisiana and corporations doing business there spend so much time to generate 2% of the state's revenue base?

Better yet, state tax reform should focus on each tax and where it can be improved. The current system should be analyzed against principles of good tax policy and the state's economic, societal and environmental goals. That will help identify what improvements are needed.

What do you think?

* Hosted by James Poulos and Alyona Minkovski; other commentators Nick Gillespie and Dave Johnson.