Overhauling the tax system is the subject of endless talk and little action in Washington. But as Republican governors in a range of states start to act aggressively on the issue, they are setting up limited but politically ambitious and potentially telling experiments in what might be possible nationwide.
It is not just that they are cutting taxes. It is how they are taking tentative steps toward rebalancing what kinds of taxes their states rely on.
In Louisiana, Gov. Bobby Jindal is pushing to repeal the state’s personal and corporate income taxes and make up the lost revenue through higher sales taxes. Go.. Dave Heineman of Nebraska is calling for much the same thing in his state. Gov. Sam Brownback of Kansas wants to keep in place what was supposed to be a temporary increase in the state sales tax to help pay for his plan to lower and eventually end his state’s income tax.
Those governors and others going down the same general path are justifying their proposals on many grounds. These include making their states more competitive in attracting employers and high-skilled workers, simplifying their tax systems and resisting pressure for more government spending as their economies and tax revenues recover gradually from the recession.
For Mr. Jin! dal and other Republican governors who have an eye on a presidential run in 2016, there are obvious political benefits to having a robust tax-cutting record to present to conservative primary voters.
But they are also taking small first steps into a fundamental debate over what kind of tax system most encourages - or least discourages - growth in a 21st-century economy.
In particular, they are focusing more attention on the idea, long championed mostly 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. And as they do so they are reigniting an ideological conflict about whether it is possible to move away from a system built around progressive taxation of income without benefiting the wealthy at the expense of middle- and lower-income people.
“The question of whether we should tax income or whether we should tax spending is really a proxyfor 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.â€
Democrats are criticizing the approach taken by Mr. Jindal, Mr. Heineman, Mr. Brownback and other Republican governors on exactly those lines. Since lower-income families spend a much greater proportion of their income than wealthier people, any shift in taxation toward sales or consumption taxes hits people on lower economic rungs relatively more heavily than upper-income households.
“These aren’t pro-growth policies â€" they’re shell games that reward the wealthiest Americans at the expense of everyone else,†said Danny Kanner, a spokesman for the Democratic Governors’ Association. “They slash critical investments in education and public safety, cost us jobs, and crush opportunity for middle-class families.â! €
! It is not clear whether any of the Republican proposals will make it into law; even in states with Republican-dominated legislatures, governors face difficulty as they pursue their proposals because changing the tax code almost invariably creates losers as well as winners.
In addition to keeping a higher sales tax, Mr. Brownback has proposed that Kansas help pay for income tax cuts by rescinding deductions for mortgage interest and property tax payments, drawing opposition even from members of his own party. Gov. Bob McDonnell of Virginia is battling to save his plan, announced this month, to end the state’s gasoline tax and make up the revenues by increasing the sales tax.
And just as President Obama has raised income tax rates on upper-income families, Democratic governors including Martin O’Malley of Maryland, Jerry Brown of California and Deval Patrick of Massachusetts have supported or implemented income tax increases on the wealthy.
The shift toward greater reliance on sales taxes is not universal among Rep! ublican g! overnors.. Gov. Mary Fallin of Oklahoma would rely largely on projections of economic growth to help offset her plan for lower rates and an eventual end to her state’s income tax.
“I don’t believe greater reliance on the sales tax is likely to be a broad trend in the country, although we may see it in some places,†said Don Boyd, a senior fellow at the Rockefeller Institute of Government who tracks state fiscal policies. “In recent years voters and politicians have generally shown in a variety of ways that they have been more willing to support tax increases on higher-income taxpayers than on the broad populace.â€
The shift toward sales taxes in some states is incremental, and nowhere near the scale or complexity that would characterize adoption of a federal consumption tax, whether a value-added tax a national sales tax or any of the other variations that have been proposed and debated over the years.
But where it is happening, the results could resonate in other states and in Washington. Mr. Jindal, whose status as a likely candidate for the White House in 2016 has drawn particular attention to his proposal, has signaled that he wants his plan to be revenue neutral, meaning that every dollar of revenue lost from eliminating the personal and corporate income tax would have to be made up elsewhere. The only viable source for making up most of the money is raising the state’s sales tax.
“We want to keep the sales tax as low and flat as possible,†Mr. Jindal said in a statement this month outlining his approach.
He has not yet settled on any specifics for changing the sales tax, and his aides say he would include safeguards to assure that lower-income people are not made worse off. “With consumption taxes, it’s all in the details,†said Tracy Gordon, a fellow at the! Brookings Institution who follows state tax and spending policies.
By focusing on sales tax revenue, Mr. Jindal has also opened up what many economists see as a fundamental issue for states. Sales taxes were developed in an era when sales of physical goods dominated the economy.
These days, the economy is built far more around services than goods. Hair spray is taxed, but not haircuts. So if states - or one day the federal government - want to shift toward a truly broad-based consumption tax, they would have to expand the definition of what people consume.
Officials in Louisiana have indicated that Mr. Jindal is at least open to looking at broadening the scope of the sales tax to include some services, potentially creating a new avenue for rethinking the tax system on both the state and national levels.
“If the sales tax is going to stay a viable source of revenues for state governments, you have to bring in services,†Mr. Henchman said. “It’s not just haircuts and tattoo parlors. It’s lawyers and accountants and real estate agents.â€
