Earlier this week budget negotiators announced that they had come to agreement on a revenue plan that would raise $990 million. Most of the revenue would come from a 1% increase in the state sales tax with lesser amounts coming from increases in taxes on purchases of cigarettes and alcohol and a 2% income tax surcharge.
Shortly after this plan was announced the Governor voiced her opposition to it, citing her desire not balance the budget “on the backs of working families.” While I’m all for focusing on working families when it comes to making choices about tax policy, in this instance the Governor’s math is way off.
The fact is that the sales and excise tax increases in the plan would have a far greater impact on working families than the proposed income tax surcharge. In fact the proposal to increase the sales tax by 1% would have cost the middle 20% of income earners ($37,000 annual income) nearly six times more than the proposed income tax surcharge. The sales tax would cost them an estimated $130 in FY 1009-10 compared to a $23 increase in income taxes because of the surcharge.
Since her press conference announcing her budget proposal earlier this year the Governor has continued to imply that somehow taxes on consumption have less impact on taxpayers, insinuating that they are somehow voluntary. Tell that to the “working family” whose washing machine breaks down. The sales tax on that one purchase alone (roughly $39 on a $500 purchase) would eclipse the additional burden from the 2% income tax surcharge (roughly $23) on middle-income families.
Here’s the great thing about income taxes on working families during tough times – when their income drops so does their tax liability. This is not necessarily the case with sales taxes because families still have to make basic purchases and they typically rely on savings, debt and government assistance to in order to support themselves until their income level recovers.
If budget-negotiators are truly starting over from scratch to craft a tax package let’s hope they seek to understand how different types of taxes affect taxpayers of different income levels and act accordingly.