Progressive income taxes are an important part of state tax systems and offer advantages that far outweigh the volatility in revenue during a recession, according to a recently released report by the Center on Budget and Policy Priorities (CBPP).
Proponents of cutting and eliminating personal income and corporate income taxes contend that doing so will spur economic growth and make the state’s revenue system more stable. However, the CBPP report highlights that eliminating income taxes would further challenge the state tax system’s ability to generate adequate revenue for public investments that promote economic growth and opportunity. The report notes that while state personal income taxes are subject to wider fluctuations, over the long-term income taxes grow more than other state taxes, and thus better reflect economic performance.
The report highlights ways that states can manage the ups and downs of state tax systems without eliminating or flattening state income taxes. Building up rainy day reserves, using extra revenues from good times for one-time expenditures, and shoring up unemployment insurance trust funds are some of the examples presented. As policymakers pursue comprehensive tax reform, maintaining the personal income tax helps ensure that the state’s tax system raises adequate revenue for investments in the building blocks of economic growth.