Not far from narrowly winning reelection, Governor Paul LePage rocked Maine’s political establishment earlier this year when he proposed slashing income tax rates and offsetting lost revenues by increasing and expanding sales taxes.
His goal: eliminating the state income tax altogether. “It is a pay raise of all working Mainers,” he told lawmakers during his State of the State speech.
LePage is one of several Republican governors seeking to radically reshape their states’ tax systems, shifting them from taxing income — what people earn — to consumption — what people spend. The proposals are reigniting the debate over which is the best and fairest way to raise revenues without harming the economy, creating huge budget deficits, cutting critical government services, and exacerbating income inequality.
It is a debate that will almost certainly play out in the upcoming presidential campaign and eventually in Washington, where the issue of tax reform is already simmering.
Consumption tax supporters say such a system encourages people to work, save, and invest, leading to stronger economic and job growth. Opponents, however, say sales taxes fall most heavily on low-income families, who must spend higher proportions of their earnings; expand the gap between rich and poor; and hurt an economy driven by consumer spending.
“Ultimately, this is reviving the longstanding debate about what’s more fair — income taxes or consumption taxes,” said Alan Viard, a resident scholar at the conservative-leaning American Enterprise Institute in Washington, D.C. “It’s been interesting to watch.”
In Kansas, Louisiana, Ohio, South Carolina, and other states where Republicans control the governor’s office and at least one legislative chamber, lawmakers are considering plans similar to those of LePage. The Maine governor has proposed slashing the 7.95 percent income tax rate to 5.75 percent, raising the sales tax to 6.5 percent from 5.5 percent, and extending it to cover services from accounting to haircuts.
In Ohio, Governor John Kasich has pushed for a 23 percent cut in income taxes over two years while raising the state’s sales tax to 6.25 from 5.75 percent. In South Carolina, Governor Nikki Haley is demanding a cut in the state’s income tax in exchange for raising the gas tax. Governor Sam Brownback led the charge in Kansas to slice the top income tax rate by about 30 percent while Louisiana’s governor, Bobby Jindal, pushed through the largest income tax cut in that state’s history.
Democrats have largely been thrown on the defensive in these states, losing key legislative votes and offering their own tax overhaul plans, such as limiting tax cuts to middle-class residents, to blunt the momentum of Republicans. Generally, Democrats argue that GOP policies are a modern version of Reagan-era “trickle down economics” that benefit the wealthy at the expense of others.
Massachusetts has a Republican governor, Charlie Baker, but both legislative chambers have been controlled by Democrats for more than a half century, making it highly unlikely a serious income-versus-sales tax battle will break out here.
Ironically, considering partisan lines in other parts of the country, Massachusetts Democrats have sometimes followed a Republican-like script. In 2009, the Legislature hiked the state sales tax rate to 6.25 from 5 percent to plug a budget deficit, and, a few years ago, extended the sales tax to software services — later repealed following an outcry by technology companies. The state’s income tax, meanwhile, automatically fell this year to 5.15 percent from 5.2 percent.
Max Behlkie, manager of federal and state relations at the National Conference of State Legislatures, said the tax policy battles are driven by changing political dynamics in state houses. In recent years, he noted, Republicans have solidified their control over most legislatures, today controlling 68 of 99 chambers in the country. “When you get down to it,” Behlkie said, “it’s about politics and about the different party views on how taxes should be applied.”
About 36 percent of all revenues collected by states come from income taxes and about 32 percent from general state sales taxes, according to US Census data. The collections tilt in favor of sales taxes when “selective” levies, such as taxes on lodging and restaurant meals, are included.
In all, 43 states have income taxes and 45 have sales taxes, according to the National Conference of State Legislatures.
Republicans often cite the strong economic performance of Texas, which has no income tax, but a 6.25 percent state sales tax. Last year, Texas led the nation in the number of jobs created, 458,000. It had the second-fastest job growth rate.
But Democrats and liberal scholars cite Kansas to counter the Texas example. There, Brownback pushed through big income tax cuts in 2012 and 2013 without offsetting sales tax increases. Since then, the state has endured huge budget deficits, credit downgrades, cuts in education funding, and, until recently, subpar economic growth.
“All these Republican governors are buying into the assumption that cutting income taxes automatically leads to economic growth and that they can rely more on sales taxes,” said Kim Rueben, a senior fellow at the Tax Policy Center, a joint venture of the liberal-leaning Brookings Institution and Urban Institute. “It’s a very regressive way to raise revenues.”
Rueben said she has studied the economic impact of cutting income taxes and found only a “small effect” in terms of growth. Economic growth in states is usually driven by other factors, such as the historically strong oil industry in Texas.
In Maine, where Republicans control the Senate as well as the governor’s office, LePage has said he will propose a constitutional amendment to eliminate the state income tax, and, like Texas, raise revenues mostly from sales taxes.
“With consumption taxes, you make the choice,” LePage said in his State of the State address in February. “You decide where you spend your money.”
He faces a major obstacle in enacting his policies — the Democrat-controlled House. Asked if the governor would get all or some of his tax proposals through the House this spring, LePage’s director of policy and management, Jonathan LaBonte, would only say that the governor can always campaign against lawmakers who oppose his policies in the 2016 election.
Maine’s House Democrats say they welcome the fight. They say they are determined to block LePage’s push to eliminate the income tax, which they argue amounts to a giveaway to the rich. The differences between the two parties couldn’t be more stark, they add, and Maine residents face a clear choice.
“It’s an important question for voters to decide,” said Representative Adam Goode, a Bangor Democrat. “It’s about priorities and what future voters want.”
Jay Fitzgerald can be reached at email@example.com.