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Some members of General Assembly have repeatedly claimed that elimination or deep cuts to personal income tax rates, especially on high-wealth individuals can solve our high unemployment and sluggish economic growth.

New research from the Center on Budget and Policy Priorities released this morning finds that pursuit of such policies are not worth the risk.

After comparing the economic performance of those states that pursued deep cuts in the 1990s and 2000s and those that did not, it turns out high tax cut states have grown far slower. Read the full report for details.

 

In Kansas, tax reform isn’t exactly playing out the way some lawmakers had hoped.  The state that Grover Norquist once called “the starter gun for tax competition” has passed a series of income tax cuts over the past year with the stated goal of eventually eliminating income taxes altogether in the near future.  This “race to zero” is well underway in several states with conservative governors and legislatures.  Here’s a quick look at how that’s working out so far for Kansas:

A $2.5B budget shortfall

The Kansas Legislative Research Department is projecting a $2.5 billion revenue hole through 2018 because the legislature has yet to figure out an effective way to replace lost revenues as a result of the income tax cuts.

A threatened credit rating

Last month, a state court ruled that the Kansas legislature was breaking the law by underfunding public schools as a result of the income tax cuts, which prompted Moody’s Investors Service to warn of a negative credit risk for the state.

Less funding for public services

Concerns over the state’s credit rating aren’t the only thing that should give Kansans pause.  By starving public schools and other services critical to economic success, the state is jeopardizing future growth. Read More

In light of Arthur Laffer’s visit to North Carolina this week, a new analysis by the Institute on Taxation and Economic Policy on the Civitas/Laffer study for our state is particularly timely. 

Their main findings are that the report:

“• Fails to control for a large range of important non-tax factors that affect state economic growth.

Confuses cause and effect by assuming that declines in personal income in 2008 were due to taxes rather than the Great Recession.

Fails to examine the impact of increased sales taxes on the economy.

Makes claims that have been previously discredited by mainstream economists and relies on misleading and cherry-picked data.

Ignores the importance of taxes in financing public investments that have a far greater positive impact on economic growth than reducing tax rates.”

Check out the report in detail here.  It adds to the mounting evidence that the Civitas/ Laffer/Senate proposal is a bad one for North Carolina, not least because its case is not supported by the rigorous research needed for undertaking such a radical overhaul of the state’s tax system.

In recent weeks, lawmakers in North Carolina have proposed a number of tax reform plans that would abolish the corporate and personal income taxes and shift the state’s revenue base to a consumption tax.  As the newest issue of Prosperity Watch describes, taking this approach would immediately eliminate 60 percent of the state’s annual revenue. How would the state fill in this $12 billion dollar hole? See here for more details.

Legislative leaders are seeking to further reduce and eliminate North Carolina’s personal income tax, despite the fact that such a plan would make the state’s tax system more regressive by shifting the tax load onto those least able to afford it. Broadly speaking, this tax shift would have huge implications for North Carolina’s low- and middle-income residents, as a new NC Budget and Tax Center report shows.

But as Dave Ribar, an economist at UNCG, points out in his blog Applied Rationality, older adults would be disproportionately impacted by the Civitas/Laffer/Senate plan that calls for elimination of the state’s personal income tax.

Tax policies that benefit older adults by reducing the taxes that they pay—such as the exemption of social security income, partial exemption of pension income, and higher standard deduction—would go away with the elimination of the state personal income tax. Spending patterns are also unique for the average retiree, argues Ribar. An increased reliance on the regressive sales tax would hit retirees harder because they spend a greater share of their retirement income on consumption items—particularly items such as food and prescriptions that would be newly taxed at the state level under this plan. Read More