The first official tax reform bill was filed yesterday by Senators Clodfelter, Hartsell, Jenkins and Meredith. The legislation takes a comprehensive approach, proposing significant changes to the personal, corporate, franchise and sales taxes including: the reduction of personal income tax rates to a single 6% rate with a zero bracket on income under $11,000 and elimination of the state EITC, the reduction of the corporate income tax rate to 6% and elimination of a number of loopholes and tax breaks, the expansion of the sales tax base to some services, a decrease in the state sales tax rate and the sharing of food tax revenue collected locally with the state.
Unfortunately, the overall plan is based on the false premise that tax cuts are necessary to support economic growth. Research released just yesterday shows that the biggest tax-cutting states in the 1990s experienced slower income growth than other states on average, and states that enacted major personal income tax cuts in the 2000s prior to the recession were as likely to lose economic ground as to gain it.
More complete analysis will be forthcoming on this proposal. But at first glance, these tax cuts are unlikely to boost the state’s economy while harming the overall ability of the state’s tax code to balance contributions from taxpayers across the income spectrum.