* Bruce Rauner’s “plan” to lower income taxes and kinda sorta replace a few dollars of them with a new sales tax on services is part of a pattern among Republican governors. Here’s a New York Times story from January of 2013…
Republican governors are moving aggressively to cut personal and corporate income taxes, including proposals that would increase reliance on state sales taxes, setting up ambitious experiments in tax reform that could shape what is possible on a national level. […]
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. Gov. Dave Heineman of Nebraska iscalling 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.
Along the way these governors are taking small first steps into a debate over what kind of tax system most encourages growth in a 21st-century economy. In particular they are focusing attention on the idea, long championed 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.
Taxing consumption has the potential to lift economic growth by encouraging more savings and investment. But the shift could also increase inequality by reducing taxes predominantly for the wealthy, who spend a smaller share of their income than middle- and lower-income people.
“The question of whether we should tax income or whether we should tax spending is really a proxy for 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.”
If you “encourage more savings and investment” through taxation, then how does that inject any demand into the economy? Demand drives growth. By their own logic, they’d drive consumption down, which would decrease demand, which would decrease growth.
For Mr. Jindal and other Republican governors who are considering a presidential run in 2016, there are obvious political benefits to having a robust income tax-cutting record to present to conservative primary voters.
But Democrats say the approach would lead to cutbacks in education, health care and other vital services while shifting relatively more of the tax burden to those who can least afford it.
“These aren’t pro-growth policies — 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.
Cutting a billionaire’s income taxes while raising sales/service taxes on the broader economy would indeed help that billionaire.
* Even so, I generally favor broader taxation at lower rates. Rauner’s service tax idea is just a first step. It could be broadened much further to take advantage of that sector’s historic annual growth. But that ought to be accompanied by a lower sales tax rate. It doesn’t have to be revenue neutral, but people should be given a break overall.
* And the same goes for income taxes. According to the Civic Federation…
The individual income tax base is expected to grow at a rate of only 1.9% compared to the retirement income growth rate of 6.5%. […]
The Illinois Comptroller estimates that this exemption of federally taxable retirement income reduced the State’s individual income tax revenues by $2.0 billion in FY2012.
So, what does Illinois do? It taxes slow-growth individual income at 5 percent and doesn’t tax high-growth retirement income at all. That doesn’t make sense.
Spread it out, lower the rate.
Easier said than done, of course. Retirees by definition have a lot of extra time on their hands for things like screaming at their legislators.
* But, if anyone has any real guts, they might wanna challenge the constitutionality of this retirement income exemption. From the Constitution…
A tax on or measured by income shall be at a non-graduated rate. At any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations.
We’re only supposed to have one personal, non-graduated income tax rate for individuals in Illinois, but we actually have two, and one of them is decidedly graduated (at the rate of zero).