Brewing 'Perfect Storm,' GOP Lawmakers Push Millionaire-Friendly State Tax Schemes

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Brewing 'Perfect Storm,' GOP Lawmakers Push Millionaire-Friendly State Tax Schemes

Despite unfair burden on lower- and middle- classes, conservative-led state governments push regressive tax plans

Maine Governor Paul LePage said he hopes to someday abolish the state income tax entirely. (Photo: Maine Department of Education/cc/flickr)

As income inequality in the U.S. continues its ascent, Republican lawmakers in several states are pushing increasingly regressive tax agendas that only promise to benefit top earners while burdening states' poorest residents.

An analysis by the New York Times published Friday notes that "of the 10 or so Republican governors who have proposed tax increases, nearly all have called for increases in consumption taxes, which hit the poor and middle class harder than the rich."

Central to Ohio Governor John Kasich's "Blueprint for Ohio," which is among the most aggressive new tax proposals, is a plan to cut state income tax by $5.7 billion and raise sales and other types of taxes by $5.2 billion. Analysts say that Kasich's agenda will only benefit the top 40 percent of Ohio income-earners while the bottom 60 percent, who make under $58,000 annually, would end up paying more in state and local taxes.

Maine Governor Paul LePage has been touring the state to promote his plan to drastically cut the state income tax from 7.95 to 5.75 percent and reduce the top corporate tax rate from 8.93 to 6.75 percent by 2021. The losses will be offset by increasing the state sales tax by a percentage point to 6.5 percent and expanding the number of goods and services that are subject to the sales tax.

During a town hall meeting last week, LePage openly acknowledged that the tax plan catered to more wealthy interests: "When you’re a millionaire in Maine, you leave," he said. "I’m trying to keep them here."

And in South Carolina, Governor Nikki Haley has tied a proposal to raise the state's gas tax by 10 cents per gallon over three years to a bid to lower the state’s highest income tax rate to 5 percent from 7 percent over a decade.

The push by GOP-led state governments to shift state revenue away from income taxes comes as the U.S. continues to face extreme and growing levels of income inequality.

"Virtually all of the states with either conservative governors or conservative legislatures followed the same basic template: cut taxes on the wealthy, cut services that middle-class and financially struggling residents depend on," notes columnist Isiah Poole at the Campaign for America's Future blog.

Poole continues: "When the trickle-down ideology of top-end tax cuts did not result in enough revenue trickling down into state coffers, states turned to regressive sales taxes and fees to close the gap. The result is more of the burden of funding state and local governments has shifted onto the shoulders of working-class people—the people stressed the most by today’s inequitable economy."

Economists Stephen Herzenberg, Executive Director of Keystone Research Center, and Greg LeRoy, Executive Director of Good Jobs First, argue that such regressive tax policies are both unfair and will only worsen growing state budget shortfalls.

"Despite the growth of structural deficits because of the one-two punch of rising income inequality and low tax rates at the top, lawmakers in many states have been choosing exactly the wrong response on tax policy," they write.

According to their report, Tax Fairness: An Answer to State Budget Problems (pdf), in the 10 states with the most regressive tax structures, the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy counterparts. According to the study, Washington State is the most regressive, followed by Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana.

The Keystone/Good Jobs study comes on the heels of report by the non-partisan Institute on Taxation and Economic Policy, which said that states' growing reliance on consumptive taxes contributes to a "fundamentally unfair" tax system, in which lower- and middle-income households pay a greater percentage of their income.

Herzenberg and LeRoy warn that rising inequality combined with increasingly regressive tax structures create a "perfect storm" for many state budgets.

"Revenue lost because of rising inequality and regressive state tax codes has led states to impose years of unnecessary austerity—underfunding schools, cutting investments in higher education, and deferring maintenance of our aging infrastructure," they write. The report calls for a new "Tax Fairness Plan" under which states employ more progressive income taxes, close corporate tax loopholes and impose small taxes on financial wealth.

The report concludes: "After 30 years of a middle‐class squeeze, it’s time to restore balance through fairer taxation."

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