April 19, 2022
Associate Director, Local Taxes
April 19, 2022
- Half a dozen states have cut individual income tax rates this year and others continue to advance tax-cut bills; fortunately, the most egregious anti-tax measures (full income tax elimination) have not advanced as voices across the political spectrum have admitted that getting rid of income taxes would devastate states’ ability to raise revenue.
- Some lawmakers claim that tax cuts have no measurable consequences on spending, ignoring decades of evidence that cutting taxes leaves fewer resources for education, infrastructure, health services and other key priorities that benefit us all.
For some state lawmakers, eliminating the personal income tax has become their white whale – a fanatical, reckless obsession that would lead to the dismantling of state revenues and basic government services.
Mythologizing income tax elimination is not new among right-wingers, but the unique circumstances of the 2022 legislative session – large state surpluses due to low revenue estimates at the beginning of the pandemic and a boost from federal aid – have prompted some state lawmakers to dust off the decades-old playbook and push their tax-cut ideology. States are in a tax-cutting frenzy as half a dozen of them have cut individual income tax rates this year and continue to advance other tax-cut bills. The revenue loss will be severe and likely will lead to cuts in programs and services, disproportionately hurting low-income residents and communities of color.
But as devastating as the cuts will be, the most egregious full income tax elimination plans have remained elusive for the tax-cut obsessed as the proposals have clashed against fiscal realities. One of the most surprising trends this legislative session is that conservative leaders and the business community joined with progressive advocates to oppose income tax repeal plans. There is a general consensus that income tax repeal is a step too far.
West Virginia is an example of a state that proposed eliminating its income tax, but cooler heads eventually prevailed. Gov. Jim Justice announced a plan for income tax elimination soon after the 2020 election, proclaiming it would attract new residents and reverse the state’s population decline. At the time, Jared Walczak from the right-leaning Tax Foundation admitted, “It’s not a panacea that solves every last one of your problems in attracting people or growth.” Nonetheless, Gov. Justice continued evangelizing different iterations of the plan for the next two years, disregarding fiscal reality: the personal income tax accounts for about 45 percent of West Virginia’s general fund. Gov. Justice’s 2021 proposal would have provided partial, regressive, offsets by increasing the consumer sales tax and expanding the consumer sales tax base, but the Chamber of Commerce and other business groups opposed. A chamber member described the plan as “one of the most reckless, unfair and job-killing pieces of legislation ever conceived.” Disagreements between the House and Senate Republicans over the revenue offsets and the types of income taxes to reduce led to a standstill.
The state’s lawmakers revisited the issue in 2022, and the House passed a 10 percent cut to each bracket with a new fund for future tax cuts, but the legislation never passed the Senate. Secretary of Revenue Dave Hardy, a Gov. Justice appointee, stated the surplus is fleeting and that lawmakers should exercise caution with tax cuts. Ultimately, Gov. Justice vetoed the part of the budget that would have set aside surplus revenues for future tax cuts. It’s possible that tax elimination efforts will continue, but for now House Republicans have acknowledged that income tax elimination would require drastic cuts to state agencies and public universities.
In Mississippi, Gov. Tate Reeves and House Speaker Philip Gunn have both pushed income tax elimination, though they have sparred over its design. Last year, Gov. Reeves insisted on full income tax elimination without any revenue offsets while House Speaker Gunn, who served as the national chairman of the American Legislative Exchange Council (ALEC), initially proposed a sales tax hike to partially offset income tax cuts (the plan would have still cost over $1.5 billion after full implementation or roughly 27 percent of the state’s General Fund Budget). At the time, many business leaders opposed the plan, fearing unintended consequences of the sales tax hike, and stating that workforce education and quality infrastructure were higher priorities. Such priorities require more state investments, though business groups are unlikely to explicitly say so.
This past session, House Speaker Gunn proposed a new iteration of the plan that maintained the current sales tax. But again, other politicians foiled his plan with the Senate and Lt. Gov. Delbert Hosemann fighting for a more cautious approach. As the tax-cut battle unfolded, industry representatives regularly voiced concern about nixing income taxes. After dozens of meetings with business leaders and numerous surveys, the Mississippi Economic Council determined that state income taxes were not a “hindrance” to most businesses and that finding qualified, reliable employees was a much larger priority. An analysis by two state economists aligned with these findings; they concluded that the large revenue shortfall would lead to fewer state government jobs, a net decrease in population, and an overall loss in personal income. The studies found that expanding Medicaid would generate more jobs and increase personal income far more than income tax elimination. In the end, Mississippi passed a regressive 4 percent flat tax bill that is heavily tilted to the wealthy; the bill also includes vague language directing legislators to consider further tax cuts in 2026. Not only is the bill grossly unjust, it will also cost the state over $500 million annually, leaving less revenue for investments in education, infrastructure, health services, and other needs. The final bill is by no means a victory, but the long-winded path that led to it revealed that even some conservative state leaders and business groups are rightly wary of income tax elimination.
Iowa also passed a colossal tax cut for the rich – a 3.9 percent flat tax bill that will cost nearly $1.7 billion annually when fully phased in and give away 76 percent of the value of the tax cuts to the top 20 percent of earners. Millionaires will receive tens of thousands of dollars, on average, while households at the median will receive a couple hundred. As disastrous as this is, Gov. Kim Reynolds was unable to meet her initial goal of full income tax elimination, as the conversation quickly turned to various flat tax proposals early in the legislative session.
Despite the strong evidence that eliminating income taxes is an unlikely and unworthy goal, politicians continue to campaign on this mythical promise of prosperity. In Virginia, Gov. Glenn Youngkin initially floated the idea of income tax elimination on the campaign trail but backtracked after winning the GOP nomination and receiving bipartisan criticism. Income tax elimination has become a key election issue in the Arkansas governor’s race as Republican candidates Leslie Rutledge and Sarah Huckabee Sanders have both said they support it. In Georgia, multiple GOP candidates have vowed to end the state income tax, including Lt. Governor candidate Butch Miller and gubernatorial challenger David Perdue. But House Appropriations Chairman Terry England, who has advocated for tax cuts, stated that it would be a disaster for K-12 education. In response to the income tax elimination plans, gubernatorial candidate Stacey Abrams said, “Georgians deserve more than gimmicks and bad math from those who seek to lead.”
But the gimmicks seem to be the point. There are states without an income tax, including Alaska, Florida, Nevada, Tennessee and a few others. But most states without an income tax have unique sources of revenue like tourism and oil production. And if not, the states impose other, more regressive, taxes that are sky-high for their lowest-income residents. Anti-tax elites have attempted to curtail states’ ability to tax income for centuries since, as historian Vanessa Williamson puts it, “progressive taxation is one of the few policies with the capacity to reverse extreme concentrations of wealth”. This practice of curbing state authorities isn’t new but the rhetoric that tax cuts are always affordable since government is useless is somewhat more recent. In his 1981 inaugural speech, President Reagan declared that “Government is not the solution to our problem, government is the problem.” His words, along with the supply-side economics framework, popularized the idea that there is a disconnect between the tax side and the spending side and validated generations of conservative politicians who claim income tax elimination will have no discernible impact on residents. Sure, Georgia can lose $14 billion a year but “there are ways to pay for it,” to quote David Perdue, who has not specified what those ways are. West Virginia Gov. Jim Justice can claim that losing a quarter of the state’s general revenue budget will naturally garner a population boom and a Disney theme park. Neither is true but it doesn’t matter since his anti-government policies will deliver on the greater goal of further concentrating wealth and power.
We’ve seen this pursuit of the white whale before. As states started to recover from the Great Recession, many including Kansas, Missouri and Oklahoma seriously considered eliminating their income taxes but mostly settled on large tax cuts. Captain Ahab’s great talent was being able to convince his crew that his nihilistic pursuit of the white whale was their shared cause; similarly, many politicians have touted their unhinged plans as “middle-class” tax cuts and a response to inflationary pressures, even though income tax cuts primarily benefit wealthy residents who were unscathed by the pandemic-induced economic upheaval. But even if state lawmakers are not amenable to arguments about tax fairness, it’s good to know that progressives are not the only opponents of risky income tax elimination plans. Many state officials, business groups, and other fiscal realists can see the plans for what they are – mythical fantasies that, if actually adopted, would lead to widespread destruction on the high seas, state leaders entangled by the line of their own harpoons. Well, maybe not quite that.