Debate continues over state income taxes, sales taxes

Monday, March 4th, 2013 By

Pie

Debate is ongoing about state income taxes and whether that’s the best way for states to get their slice of the pie. Image from Wikimedia Commons.

No one likes taxes, but do like to have the benefits they provide. There’s been an ongoing tug of war over whether state income taxes are better than sales taxes, with a mixed bag of things for and against both methods of getting the public to pony up.

State income taxes subject of recent debate

Everybody loves to complain about taxes but wants the benefits they provide. Roads, schools and so on have to be paid for, at the federal, state and local levels.

How states procure them is through state income taxes, sales taxes, property taxes and a few other types of taxes. Most states use a blend of income, sales and property taxes. State income taxes have been a bit of a hot topic of late as the governors of Nebraska, Louisiana, Kansas and North Carolina, according to Forbes, are trying to get rid of their respective state income taxes.

Could save money

Granted, eliminating state income taxes means more cash in people’s pockets, ostensibly.

The John W. Pope Civitas Institute, according to a Forbes article written by its president, estimated that had North Carolina’s income tax been repealed in 2000, statewide total personal income would have risen $14.4 billion to $25 billion, or $1,500 to $2,600 per employed person. Median state income tax in the Tar Heel state is $2,100 per person.

Or not

Nine states lack state income taxes, according to the Center on Budget and Policy Priorities, a federal and state budget advocacy organization of good repute, namely Texas, Florida, Nevada, New Hampshire, Alaska, Wyoming, Tennessee, South Dakota and Washington state.

They also have higher sales taxes and property taxes on average. New Hampshire and Alaska have no sales tax. The rest have higher-than-average sales taxes, with an average annual layout of $1,143 and 2.8 percent of annual income in 2009, compared to the $948 and 2.4 percent average for the rest of the nation that year. Six of the nine have higher-than-average property taxes.

The national average property tax in 2009 was $1,381, or 3.5 percent of personal income, compared to an average of those nine states of $1,545 and 3.7 percent.

Eliminating Lousiana’s income tax could, according to some estimates, boost the state sales tax from 4 percent to 7 percent, according to the Christian Science Monitor. Louisiana’s state sales tax is combined with local sales taxes averaging 4.86 percent statewide, for a current sales tax rate of 8.86 percent – third highest, nationally. Sales taxes account for less than half of state tax income – $2.6 billion compared to $2.9 billion in personal and business income taxes.

However, according to USA Today, eight of the nine states with no income tax are in the top 10 lowest state burdens by share of income paid in taxes.

Income inequality

Sales tax critics assert that state income taxes make tax burdens fair as everyone pays the same rate or a progressive one. Sales taxes put larger burdens on poorer households by taking a larger share of income.

A study by the Institute for Taxation and Economic Policy found in 2009 the Washington state sales tax was regressive, as wealthier people indeed paid less in sales taxes as shares of income, according to the Seattle Post-Intelligencer. Those making $20,000 or less annually paid 17.6 percent of their income to sales taxes, compared to 7.6 percent for those making between $99,000 and $198,000. The top 1 percent of earners – $500,000 or more annually – paid 2.9 percent.

Sources

Forbes

CBPP

Christian Science Monitor

USA Today: http://www.usatoday.com/story/money/personalfinance/2012/10/28/state-taxes-states-highest-lowest/1654071/

Seattle Post-Intelligencer: http://blog.seattlepi.com/seattlepolitics/2009/11/18/study-washington-state-has-usas-most-regressive-taxes/

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