State Budget Shortfalls Present a Tax Reform Opportunity

The Tax Foundation released a new report (Special Report No. 164) on the State budget shortfalls and states that it could be an opportunity for tax reform.  I noted what was described as an unstable revenue source in the report, as AFFT has reported that consumption is more stable than income.   Tax Foundation’s Joseph Henchman in his report (and in a podcast discussion) recommends a broader tax base with lower rates and eliminating targeted tax credits.  This may be an opportune time for groups pushing state FairTax legislation.

Key Findings

• Forty-five states face budget shortfalls of varying degrees, totaling approximately $132 billion through fiscal year 2010. However, every state but one expects revenues in 2010 to be higher than in 2006, and all but nine states have seen revenues grow faster than inflation from fiscal years 2006 to 2009.

• States hit hardest are those that relied most heavily on growth in unstable revenue sources like taxes on capital gains, high-income earners, and corporate profits.

• Punitive taxes on unpopular groups, such as smokers, drinkers, or high-income earners, are poor tax policy and a source of instability because they force a small group of people to pay for government services broadly available to all citizens. Shifting the burden of paying for these programs away from most taxpayers can result in demands for more government than people are actually willing to pay for.

• State and local officials are more frequently using the “Washington Monument” ploy-threatening to cut politically popular services to create pressure for tax increases.

• Broadening tax bases, lowering rates, and eliminating targeted tax credits can generate extra revenue without unduly harming a state’s economic performance.

By Joseph Henchman

1. A sales tax on people at a state level makes sense — always has.

   But Fairtax isn’t anything like that. Fairtax is a sales tax on people AND government — because Fairtax charges government this same sales tax.

   Mark  ·  Mar 25, 2009 at 9:14 am  ·  Permalink

2. I was just on the white house web site for the ask the president questions day. and i was amazed to see a lot of questions asking the president to consider the flat tax or serious tax reform. How do we get this out to the masses… how do we get a real meadia storm.. with all the news on bail outs and such.. pepole need to know that there is a better option out there that will help everyone….

   andrew klinger  ·  Mar 25, 2009 at 11:16 am  ·  Permalink

3. Mark,

   So your point is? Here in California, the state has very explicit exemptions for government agencies. That part of the existing structure does not necessarily need to change. What does need to change is the rest of the income/sales tax structure. Using the Fair Tax as a model to reform these taxes would be a very good idea. The easiest way would be to simply tax all consumption without exemption at a much lower rate and then give every household a tax credit on their income tax for the amount of the tax up to the poverty level for their houshold size to cover the tax for basic needs.

   RMForbes  ·  Mar 26, 2009 at 11:06 am  ·  Permalink

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