Three years ago, Kansas Gov. Sam Brownback spearheaded efforts that resulted in the largest tax cuts in state history. But battered with budget shortfalls, Brownback is dialing down his aggressive plan to slash the state's income tax. That move, however, hasn't dampened the desire in several states to similarly slash away at major revenue streams.
In fact, two significant tax overhaul plans are making their way through state legislatures in Maine and Ohio this year. In Maine, Republican Gov. Paul LePage has proposed massive tax reforms that include an eventual elimination of the state's income tax. The proposal cuts Maine's top income tax rate from 7.95 percent to 5.75 percent, potentially saving taxpayers $938 million over the next four years. To counter the lost revenue, LePage wants to raise the sales tax to rate 6.5 percent from 5.5 percent and expand it to include services like amusement and historic parks, fitness centers, maintenance and repair services, salons, dating services, and legal and financial services.
Meanwhile, Gov. John Kasich wants to nix Ohio's income tax altogether. He wants to start by cutting it down to 4.1 percent over the next two years. That's a drop of nearly one-quarter from the 5.9 percent income tax rate in 2011, when the Republican first took office. Kasich is also asking for an increase in the state's sales tax, as well as hikes in the commercial activity tax, oil and gas severance taxes, and the tobacco tax. But total state tax revenues would still be reduced by an estimated $500 million.
The proposals come as Gov. Brownback is pulling back on tax cuts. Kansas has been struggling with budget shortfalls and downgraded credit ratings since it passed major tax reforms in 2012 and 2013 that lowered the state's top income tax rate by more than one-fourth and includes provisions to eliminate the tax entirely if certain revenue terms are met. This year, Brownback is sticking with his income tax cuts -- but they are smaller than initially planned. And he's delaying his goal of dropping the top tax rate to 3.9 percent and the lowest tax rate to 2.3 percent by 2018. Brownback, a Republican, is also asking lawmakers to increase sales taxes on liquor and tobacco products.
Critics of these three proposals charge that the plans help the rich at the expense of the poor. Sales tax hikes, they argue, are unfair to low-income families because they cannot avoid purchasing essential items. So these families end up giving a larger share of their income over to the tax increase. Income tax reductions, on the other hand, are seen as most beneficial for the wealthy.
An additional challenge, according to Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers, is sustainability. The U.S. economy has become increasingly driven by services, which are not taxed, instead of goods, which are. "In the past couple of years we've seen more of a discussion of lowering the income tax with raising sales tax as a tradeoff," Sigritz said. "And with that has come this discussion of also trying to broaden the base, but so far no state has really gotten at services tax reform."
It's that issue that makes Maine's plan more politically difficult, according to Tax Foundation economist Scott Drenkard. Still, a healthy sales tax should be applied broadly, he says, and include all types of final consumer transactions. That makes LePage's plan more soundly rooted in a policy of moving away from income taxes in general and toward taxes on services, versus Kasich's plan which seems driven solely by the income tax. "He seems more determined than anybody I've ever heard before to eliminate the income tax," Drenkard said. "He's so focused on that, he's hiking other taxes that can potentially be damaging to commercial growth."
Reducing the income tax -- if not nixing it entirely -- is seen as a legacy project for many governors, says Sujit CanagaRetna, fiscal policy manager at the Council of State Governments. Nearly every year, a handful of proposals are presented to state legislatures yet few succeed. But the post-recession years have seen governors more often offer up a serious compensatory tax in exchange for reducing the income tax. It's a move that acknowledges today's economic reality that an income tax cut can't just be offset by budget cuts -- many of those cuts were already made during the downturn. "I think raising the income tax is the toughest challenge to overcome," CanagaRetna says. "Simply put, some of these other taxes might be less controversial."