Thursday, October 31, 2013

Texas needs an income tax

So Republican candidate for Governor Greg Abbott recently accused Democratic candidate Wendy Davis of wanting to raise Texans' taxes by $35 billion.

Ho hum.

Politifact then suggested that Abbott was full of it.

What else is new?

What Davis suggested that she wanted to do was put together a board of state officials to examine exemptions from current state taxes to see if they were still warranted, most notably the gas tax and the sales tax.  She said she she didn't want to raise current tax rates, but wanted to especially examine the $36 billion in sales tax exemptions.

This is good policy, and I'm supportive of the review (particularly of a several odd-looking exemptions, like those surrounding aircraft....)

But when it comes to taxes, I (as a naive carpetbagging Yankee) would like to see Texas adopt a personal income tax; it's currently one of nine states without one. That might be political suicide for Davis right now, so I don't blame her for not bringing it up. Over the long-term, however implementing an income tax will diversify and stabilize state revenues while redistributing the tax burden to the upper class and away from more vulnerable state residents.

Take the jump for more details.....

Income taxes in and of themselves aren't necessarily progressive, just like sales taxes aren't necessarily regressive.  We could imagine an income tax that simply levies higher rates on lower incomes (like the Social Security payroll tax does), which would be quite regressive. In contrast, we could imagine a sales tax that only taxes luxury goods, which would likely have a more progressive effect.

However, sales taxes generally tend to be regressive because they tax broad swaths of goods and services and have a larger marginal effect on low-income people (though exemptions on some necessities, like groceries, help a bit).  In contrast, income taxes tend to be progressive. Even states with a flat income tax rate, like Michigan, function slightly progressively by exempting the first several thousand dollars of income. States like New York have a more progressive rate structure.

It's tough to compare the three states' economic fortunes and budget politics, because they face three entirely different situations (Texas= low wage jobs, massive immigrations; Michigan= reliance on a old declining industry; New York=finance capital of U.S.), but looking at where they are getting their revenues does give an idea of how progressive their tax systems are. For its next two-year budget period (2014-2015) Texas expects to get about 64 percent of its revenue from a sales tax, and zero from an income tax. In 2012, Michigan took in about 38 percent of its revenues from sales and use taxes  and 32 percent from its income tax. In contrast, New York took in 63 percent of its 2012 revenues in income taxes and only about 22.4 percent from sales and excise taxes.

I know which structure a good progressive would prefer (hint: the hedge fund manager can afford to pay, the janitor buying shoes for his kids can't).

Back to Texas.

Then- Lt. Gov Bob Bullock (God rest his soul) suggested an income tax in the early 1990s, but got hung out to dry -- and in a reversal backed  a successful constitutional amendment that would require a statewide vote on the subject But still, the mechanism exists: It would have to be approved through a state-wide election. 2/3 of the revenue would go to reducing property taxes and 1/3 would go toward education. That might not be quite my preferred allocation, but investing in education is a worthy goal. Also, if managed right, the reduction on the reliance of property taxes for local funding as well as an infusion of state funds for schooling could do a great deal to equalize funding levels for education across the state.

This isn't going to happen tomorrow, and almost certainly won't happen in 2014 or 2016. However, fundamental changes to the tax structure are one thing that good progressives need to keep in mind as one ultimate policy goal they have if they can wrest control of the state government away from the Rick Perrys of the world.

(Oh, and while we're at it, we may as well jack up the oil and gas severance tax a bit down here. It's not like oil companies are going to leave the state -- they can't take our petroleum reserves across state lines.)

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