It didn’t take long for policymakers to return to a tax shift in order to pay for the massive tax cuts under their proposed reduction of the personal income tax and elimination of the corporate income tax. The latest Senate plan that passed on the floor on Wednesday expands the sales tax base and eliminates or caps various sales tax exemptions.
Even then, there will still be nearly $1 billion annually lost to the state when the bill is fully implemented. In the meantime, on average, taxpayers with income less than $169,000 will see their tax load increase while the top 1 percent, on average, will see a tax cut of, again on average, $11,000.
Why is the Senate tax plan a tax shift? By significantly reducing the revenue collected through the personal income tax, the Senate tax plan ends up increasing the reliance on the sales tax to pay for our public schools, health services, courts and infrastructure. Greater reliance on the sales tax means a greater impact on low- and middle-income taxpayers who spend more of their annual income on taxable goods and services than upper-income taxpayers. To help offset this increased impact, the expansion of the sales tax base should be paired with a strong Earned Income Tax Credit, which is not included in this tax plan.
By closing various sales tax exemptions that impact businesses and non-profits, the sales tax is likely to also be passed on to consumers (or patients/ clients) in the form of higher prices and thus will have an impact on individual taxpayers too. Our distributional analyses of sales taxes look at the final incidence of the tax. This means that our sales tax incidence estimates include not only the sales taxes paid directly by consumers when they buy goods and services at retail, but also the effect of the sales taxes paid initially by businesses.
Like the plans before it, the Senate has not proposed reform but a tax shift. The beneficiaries will be the state’s wealthiest taxpayers, out-of-state shareholders and profitable corporations. More than half, 56 percent, of the net tax cut goes to those in the top 1 percent of taxpayers whose income averages $940,000. The corporate income tax will overwhelmingly benefit shareholders out-of-state.
Not only will the bottom 80 percent of taxpayers see an increase in their tax load on average to pay for these tax cuts at the top, everyone will pay the price for this plan. That’s because it will also reduce revenue by $1 billion each year when fully implemented. Such a lower level of revenue collections will occur when the state’s population is growing and graying and the state’s economy requires investments to stay competitive in an innovating and advancing marketplace.