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GOP takes aim at state taxes

Governors want to cut or eliminate income tax, but the challenge is figuring out how to make up lost revenue at a time when state budgets are already suffering.

By MSN Money Partner Jan 30, 2012 6:33PM

This post is by Sean Murphy of The Associated Press.


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. (Post continues after video.)

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


A number of states are looking at cutting taxes:

  • In Oklahoma, Republican Gov. Mary Fallin says gradually cutting the top income-tax rate of 5.25% 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.
  • Maine's GOP-controlled Legislature voted last year to lower the income tax from 8.5% to 7.95%, 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% to 7.6%, the same as the corporate income tax rate, and then gradually lowering both to 7%. 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 transferable 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 say 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 conservative think tank in Washington, D.C..


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 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% to 4.75% 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% of Oklahomans, mostly low-income families and those with children.


"We have grave doubts about this proposal," said David Blatt, the 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."


Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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Jan 30, 2012 11:31PM
No state income taxes..boy that's great, so they will off set it with a consumption tax ie higher state sales taxes on everything we buy and if we are in the "miiddle class" and have to spend every dime we make, we will pay more while those in the 1% pay less because there is no tax on financial purchases of stocks, bonds, mutual funds, etc. I know the 1 % create how many jobs did Mitt create in Irland, Switzerland and in the Caymans with the money he put there??? Eliminating a progressive state income tax is just another way to put the tax burden on the middle class while the 1% rape the USA.
Jan 30, 2012 8:46PM

Wow.  So, since trickle down worked so well on a national level, lets apply it to the state level as well.


Lets cut taxes for the biggest gain for the smallest number of people.  Since most state income taxes are phased in just like federal taxes.  Middle Class people get A couple hundred.  1% get tens of thousands, if not hundreds.


And in the same list of articles that this one appears, is another one showing 11 states that are in financial disaster and can't pay their bills, and some of those don't have a state income tax to rely on.  Lets make it all 50 states that can't pay their bills.  Then, let China come bail them all out.


Jan 31, 2012 12:10AM
I couldn't have said it better myself Gerrrr53!It's sad what's happening to our country.This is just more of the same from the elites and oligarchs.
Jan 31, 2012 7:15AM

It's all smoke and mirrors folks.  The money has to come from somewhere and we'll all pay one way or the other.

On the lighter side, maybe we could put a tax on every text sent via cell phone. My grandaughter sent over 500 in one weekend when she came to visit. Thank God our plan is unlimited.

Jan 31, 2012 1:46PM
Honestly, some of these politicians must be living in a parallel universe.  No state income tax, but property taxes will be raised along with fees and anything else they can think of.
Jan 31, 2012 1:13PM
A tobacco tax is no substitute for state income tax. Smoking rates are decreasing nationwide which means this revenue stream is unreliable in the long run. At worst, this tax would demotivate states from trying to reduce tobacco consumption.
Jan 30, 2012 8:50PM

Missouri has a bill to reduce income taxes and offset the lost revenue by raising the cigarette tax. 
These guys are onto something.  Let's do away with all regular taxes and just go after sin.  It would be kind of like voluntary taxation.

Here's some more things we could tax:
Sugar and all sugar-like substances
Beer (I would make my own)
TV watching

Of course we would have to legalize some of them first, like prostitution, porn, and marijuana. Just think, no more taxes unless you wanted to have fun.

Jan 30, 2012 8:29PM

This is smart. An income tax in today’s environment is not wise. But look at the Business Income Tax first, then lower income tax, then the remainder. But do not use it as an excuse to Reduce the State Government but replace it with other tax sources. I just hope this is what they want; some of the GOP just talk like the want the right to sell you Blue Apples as Green.

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