North Carolina Governor Pat McCrory shows a strong commitment to tax reform. From the bill he signed in 2013 – which transformed the state’s income tax from a multi-rate mess to a logical flat-rate tax, among other pro-growth changes – to his current leadership as the North Carolina legislature hammers out budget details, McCrory brings a disciplined approach to improving his state’s economy.
As the House and Senate determine the particulars of the new state budget, some disagreements have arisen. Certainly, the conservatives leading both chambers agree that reform is necessary; they want to see lower taxes and reduced government spending. Yet they are divided when it comes to approach. There are basically three factions: the “Fair Taxers,” the “Flat Taxers,” and the “Balanced Taxers.” The Fair Taxers would like to eliminate North Carolina’s state income tax entirely, and introduce a broad-based sales tax on retail goods and services. The Flat Taxers wish to keep the single marginal rate, as well as properly redefine the tax base in order to prevent the double-taxation of investment income. The Balanced Taxers find the strategies of the Fair Taxers and Flat Taxers too bold, and instead advocate for a diverse portfolio of state revenue sources.
Tax reform isn’t exactly something we associate with California. With the highest income-tax rate in the nation (and the third-worst overall state business tax climate, per the Tax Foundation’s most recent rankings), the Golden State offers plenty of practical lessons in how not to run an economy. However, California State Controller Betty Yee recently suggested tax reform that shows a clear understanding of the peril facing California’s economy – and offers ideas that could restore energy and momentum to a sluggish state business climate.
Yee, a Democrat, wants to broaden the state tax base. California bureaucrats have grown far too accustomed to relying on the top 1 percent, treating them as “cash cows” for the treasury. Yee views this approach as both shortsighted and unsustainable, particularly given the wild fluctuations in the incomes of the rich (which dip or soar based on capital losses or capital gains, and which are the most mobile of American incomes).
Maine Governor Paul LePage is unwilling to accept the status quo when it comes to his state’s economic future. While in the past he’s proven willing to play the long game by accepting gradual cuts, a simple reduction is not the Governor’s goal. He’s taken a firm stand,announcing a bill to eliminate the state income tax by 2020.
Of course, LePage’s bold trajectory is not surprising. During his State of the State address in February of this year, the Governor said unequivocally: “My vision for Maine is a Maine without an income tax.” He further demonstrated his commitment to meaningful reform, explaining that the income-tax elimination must become permanent via a Constitutional amendment. Taking this ironclad step would, LePage reasoned, “remove the burden that the personal income tax places on Maine families – from retirees on fixed incomes to job creators.”
When Kansas Governor Sam Brownback enacted his bold approach to tax reform, he gave a much-needed boost to small businesses throughout the state. Thanks to Brownback’s tax cuts, these businesses can make greater investments, hire more employees, and set themselves on a more stable course toward the future. Considering that 44 percent of working Kansans are employed by small businesses, the Brownback tax cuts positively impact thousands of families.
Unfortunately, no good deed goes unpunished, with outlets like the Kansas City Star questioning the wisdom and efficacy of the cuts. The Star’s editorial board published a column downplaying the positive impact the cuts have had on the state’s small businesses and expressing skepticism about Kansas’ ability to draw in business from states with higher tax burdens. In an excellent rebuttal to the Star’s editorial, the Kansas Policy Institute outlines the problematic nature of their claims. While successful growth is typically measured in the number of private-sector jobs created, the Star instead uses (but does not disclose this fact) nonfarm jobs – in other words, the total of government and private sector jobs.
This week, Investor’s Business Daily (IBD) ran aneditorial declaring that the tax cut Kansas Governor Sam Brownback and the state legislature passed in 2012 “is working.” Newly released data from the U.S. Bureau of Labor Statistics show that Kansas and Utah are tied for first when it comes to state job growth estimates.
Here are the highlights from the report:
- For the first two months of the year, Kansas increased its non-farm jobs by 9,500 and the private sector added 9,000 jobs for March.
- In a state-to-state comparison, Kansas placed 2nd in private-sector jobs growth in February.
- Private-sector jobs from February 2014 to February 2015 grew by 21,200 — one of the most significant increases in the country.
- Kansas surpassed all neighboring states except Colorado in private job gains over the year.
In 1912, Mississippi became the second state in the union to levy a personal and business income tax (after Wisconsin). By 1940, 33 states had an individual and/or corporate income tax.
Fast-forward 100 years.
In 2014, Mississippi’s business climate was ranked 37th out of the 50 states. The state improved only one position since 2013.
Republican leaders in the state of Mississippi are responding to the state’s negative standing. They have entered into a spirited competition over tax policy this legislative session. But take note: This isn’t the typical pro-tax versus anti-tax clash. The pivot to creating pro-growth tax policy came late in 2014, just before the start of the 2015 legislative session, from Governor Phil Bryant. His relatively modest tax cut proposal, which called for a $79 million tax cut for families earning less than $50K annually, would only apply in years when the state sees revenue grow by at least 3 percent.
The states aren’t waiting for the federal government to come to terms on tax reform. According to last Friday’sWall Street Journal opinion piece by Stephen Moore, there are at least 20 governors who are moving forward with pro-growth tax reform initiatives this year.
Moore (who is chief economist at the Heritage Foundation and the co-author, along with Arthur Laffer, Travis H. Brown, and myself, of “An Inquiry into the Nature and Causes of the Wealth of States”) highlights several such initiatives, including those in Arkansas, Illinois, Maryland, Massachusetts, South Carolina, Illinois, Maine, Tennessee, Indiana, and Nebraska.
The 21st-century path to state economic prosperity, increased wages at every income level, employer re-investment, and job creation is in fact pretty straightforward. It is not a matter of wealth redistribution; it is a matter of wealth creation. It is not about slicing up a shrinking pie; it is about creating a bigger pie through economic expansion.
The pro-growth policy path is clear: cut income taxes on small business and their workers; broaden the sales tax base; wipe out corporate loopholes and cronyism that come in the form of tax breaks for favored industries; and provide sales tax rebates or “pre-bates
to low-income households. When states grow, property taxes and sales taxes are multiplied by a growing gross state product, which in turn increases government revenue and its ability to provide more social services.
Two actions taken this week by Illinois Governor-Elect Bruce Rauner indicate that he plans make good on his pro-growth campaign promises. And Illinoisans across the state must be breathing a heavy sigh of relief.
Illinois’ state-run pension plans are quite simply bleeding the state dry. Illinois’ pension debt now is well over $100 billion. According to an Illinois Policy Institute (IPI) report released this week, the state contributes the equivalent of up to 127 percent of its state employee salaries just to meet the defined-benefit pension systems’ obligations. In the average private sector, where employers have shifted to defined-contribution plans, the employer contributes the equivalent of 9 to 10 percent of a worker’s salary each paycheck.