Tax Notes: White House Report Examines State Income Tax Elimination
A report from the White House touts the benefits of states eliminating their income taxes in favor of a broader sales tax, but one group contends that the report’s figures don’t hold up to scrutiny.
The 18-page report from the White House’s Council of Economic Advisers, issued January 28, argues that raising income taxes, particularly corporate income taxes, triggers “unwanted behavioral responses that compound into substantial economic losses for the state and its citizens,” such as taxpayers moving to states with lower or no income taxes.
The report provides two scenarios under which a state could replace the revenue it loses from eliminating income taxes. These are a “spending limit” approach, using a broadened sales tax with a state government limit on spending growth of no more than the rate of inflation for a 10-year period but real GDP grows by 2.5 percent annually; and a “full revenue replacement” scenario, using a broadened sales tax with state government spending that grows at the same rate as the state GDP.
The CEA report comes as Missouri Gov. Mike Kehoe (R) has called for a ballot measure to eliminate the state income tax, which has a top rate of 4.7 percent. Georgia lawmakers have also released a plan to gradually phase out the state’s flat income tax.
Income tax cuts took effect in nine states beginning January 1. In three of those states — Kentucky, Mississippi, and Oklahoma — income tax rates could be reduced further or be zeroed out over time if revenue triggers are met.
But one group says the CEA report’s figures vastly underestimate the rates at which states would need to set their sales taxes to claw back forgone income tax revenue.
In a January 29 post, Jared Walczak of the Tax Foundation said that the report’s calculation of a national average sales tax rate of 6.23 percent may be accounting for a 100 percent tax compliance rate — which wouldn’t be realistic — or may be including in the sales tax base items that are already subject to separate excise taxes or would be illegal to tax.
He estimated that the average state replacement rates, when accounting for different factors, could range from 12.08 percent to 17.51 percent.
