COVID-19 Unveils Need for Fair Taxation at the State Level

June 11, 2020

Guest Blogger

A version of this blog originally appeared in Common Dreams.

By Ben Chin, Maine’s People Alliance

Most people assume that the federal government is the main—if not only—agent for ensuring economic stability and recovery in response to COVID. Yet, the fight for tax fairness at the state level will have a dramatic impact on economic recovery. The effectiveness of state-level campaigns, like those led by the Maine Center for Economic Policy and my organization, the Maine People’s Alliance, will determine the future of inequality in America just as much, if not more, than federal legislation.

This idea defies conventional wisdom that typically views recovery in a “Keynesian” way—popularly understood as deficit-spending fiscal stimulus.  Yet John Maynard Keynes had a far more specific diagnosis of what it takes to trigger economic stimulus, one that suggests a crucial role for the states in establishing progressive taxes and public investments.

In The General Theory of Employment, Interest, and Money, published during the Great Depression, Keynes diagnosed the roots of the depression as directly related to economic inequality. His argument turned on the “psychological law” that one’s spending did not increase at the same rate as one’s income; people—particularly the rich—tend to save more, the further from subsistence they get, reducing consumer demand. If a society suffers from great economic inequality, as it did in the 1920s and today, more and more income flows to the wealthy, lessening aggregate demand, leading to crises.

For Keynes, the policy to fix this, therefore, was not simply deficit spending, which does little to address underlying inequality. Instead, he recommended high taxes on the wealthy, interest rates low enough to prevent wealth from snow-balling, and “a somewhat comprehensive socialization of investment.” In other words, the government ought to stimulate the economy by taking capital from the wealthy through progressive taxes and low interest rates, making broad investments into public goods, and, thereby, ensuring a more equal society with greater consumer demand from low-, moderate- and middle-income people.

Deficit-spending, now the characteristic we most closely associate with Keynes, came as politicians adapted the theory to suit the needs of legislative coalitions uninterested in raising taxes. Democrats contributed as much to this idea as Republicans. President Kennedy’s tax reform packages of the 1960s were the first to move America away from the bi-partisan consensus supporting confiscatory top income tax rates of more than 90 percent. Much of the rhetoric from Kennedy’s budget messages, that tax cuts for the wealthy would stimulate investment, is indistinguishable from President Reagan’s. Indeed, the Vietnam War, not the post-9/11 wars in Iraq and Afghanistan, became the first financed by deficit spending. While Republicans came up with the clever name of “job creators,” they really just doubled down on the play already used by both parties.

Cutting taxes for the wealthy—as Keynes would have predicted—did not go well. Inequality soared; neither party really had a program to check this dynamic, leaving voters, organizers, and social movements out of luck when advocating for reform. While left-of-center wonks didn’t share conservatives’ purported fears of deficits causing long-term fiscal and monetary problems, they lost the broader point about inequality. If anything, financing paid leave programs through bonds repaid to Wall Street only magnifies the problem.

Now back to our situation. We must ask ourselves: who is best positioned, not just to make up for the under-consumption in our economy, but to tax the wealthy to provide for social investments? Obviously, states have a much stronger interest in this play, precisely because deficit-spending is off the table. Indeed, most social investments—from schools to roads to medical care for the poor—are managed at the state and local level.

Unless states dramatically raise revenue, even with the federal help that has been promised, they will be forced to make dramatic cuts, further depressing demand. National recovery simply cannot happen without progressive tax increases at the state level. And states, unlike the federal government,  have to raise taxes if they are to preserve even the barest of services. The questions are only: will it be enough; and, will it make the economy fairer?

Further, as Institute on Taxation and Economic Policy (ITEP) research has shown, states also have substantial room for improvement. Most states have regressive tax codes, meaning they tax high-income earners at lower rates than anyone else. In fact, most states have upside-down tax systems with the poorest 20 percent paying a significantly higher average effective tax rate (11.4 %) than the top 1 percent (7.4%). 0 In other words, we can only ignore states at our peril.

Unfortunately, that too is something that both parties have consistently done. As Josh Mound describes, in the 1960s, universal programs—like Social Security and Medicare—paid for their expansions largely through regressive payroll taxes. Meanwhile, anti-poverty programs, almost always joint state-federal ventures, required states to rely on more regressive sales and property taxes to pay for their share. Thus, the first “tax revolts” of the 1970s came from the left, not the right, as non-partisan congressional studies found that regressive tax increases (primarily from the state and local level) were the single largest stressors on the pocketbooks of working-class American families during “stagflation.”

Coalitions of labor, Black activists, Saul Alinsky organizing groups, and Ralph Nader consumer rights advocates argued for tax fairness—raising taxes on the rich and lowering them on the working class and poor. Watergate, however, wiped out the few Republicans sympathetic to the cause. By the time of Proposition 13 in California, conservatives merely dropped the demand for taxing the wealthy, fixated on cutting taxes for everyone, and sprinkled a healthy dose of race-baiting on the top: presto, the conservative tax revolt that is the basis of the modern movement today.

We should not make the same mistakes. States must take the opportunity to dramatically rebalance their tax codes, making safety net programs truly re-distributive. If the federal government hits the gas while states hit the brakes, we will get nowhere fast. Consumers won’t have access to cash; the economy won’t recover; political revolts will make it impossible to build a coalition for the kinds of social investments necessary to truly check inequality.

This is possible. Even under the most Trump-like governor in America, Paul LePage, advocates managed to establish a cap on itemized deductions, pass a referendum that put a 3 percent surcharge on the top 2 percent of income earners, and massively expand tax credits for low-income Mainers. All of this required craftiness that community organizers in Maine, like me, would happily discuss over Zoom beers. Some of it was repealed. (But the point is that it’s possible. Today, Maine’s state tax code asks (slightly) more of upper-income families than of lower- and middle-income earners.

And if, in the end, this has not convinced you that states can lead, my final argument is less about policy, and more about our basic social contract. Fiscal policy is where the rubber really meets the road. When we make decisions about who pays for what, we lay bare our values. The fact is, there has never been a real, national movement to progressively pay for basic public goods. Public goods provided for nationally, like Social Security, are paid for by regressive payroll taxes. Public goods provided for locally, like education, are paid for by regressive property taxes. It just is not practical to imagine, overnight, a national movement will force a new policy paradigm here, completely bypassing any progress at the state level. Instead, we need a wave of fair taxation at the state level for public goods, equivalent to the massive shift in federal income taxation that occurred during World War II.

Armed with analyses about the impact of state tax policy, particularly the in-depth Who Pays? report that demonstrates the inherent unfairness in our tax systems, we have no excuses. The progressive movement ought to take up the lost banners carried by the diverse cast of Keynes, Black activists, Alinsky, Ralph Nader, and so many others to finally argue for fair tax policies and critical social investments we’ve always wanted.

Ben Chin is the deputy director of the Maine’s People Alliance.