“Services will be taxable unless otherwise exempt,” said Joseph Testa, Ohio’s tax commissioner. “That’s the shift we’re trying to make, move more toward a consumption base than an income tax base.”
In North Carolina, Senate Republicans have proposed replacing the income tax with a far more aggressive sales tax on services from shoe repair to legal work and public relations. The plan closely resembles Dayton’s proposal, with two differences: It proposes raising the sales tax rate dramatically, perhaps to as high as 8 percent, and the proceeds would go to phasing out the income tax instead of property tax relief.
Looking to boost jobs
In most states other than Minnesota, the goal is to cut income taxes, which states see as a way to attract businesses and jobs.
“There is a lot of movement into higher sales tax and limiting income taxes, often by Republican governors,” said Kim Rueben, an economist at the Tax Policy Center.
Income taxes are seen as punishing earning, saving and investment, she said, while a sales tax is seen as a tax of choice. Though sales taxes are criticized as regressive — falling harder on the poor by taking more of their total income — states see them as more friendly to economic growth.
Studies — notably the conclusions of supply-side economist Arthur Laffer — have asserted that if a state lowers or eliminates its income tax, it will grow faster than states with high income taxes. This point is hotly disputed, but it has found currency among Republican governors, Rueben said.
Louisiana Gov. Bobby Jindal, Nebraska Gov. Dave Heineman and Kansas Gov. Sam Brownback all have proposed eliminating their state individual income tax, and paying for it with new sales tax revenue.
In Kansas, Brownback has called for a “glide path to zero” income tax. The state cut income taxes in 2012 to compete with surrounding states for economic activity and population. Texas, which has no income tax, looms large in the region, and Great Plains states are racing to lower income taxes.
Steve Anderson, the Kansas budget director, argues that companies will move to states with lower income taxes to give their employees an effective raise and bolster their companies’ bottom line.
“If I can drive profits up $90 million just by moving, and that rolls to my bottom line, while that seems small, that’s an annual event,” said Anderson, who was appointed by Brownback after he was elected in 2010. “That’s a factor. Companies think that way.”
Brownback wants to help pay for income tax cuts by keeping in place a 0.6 percent state sales tax increase that was imposed in 2010 and meant to be temporary. The seemingly small increase demonstrates the quietly massive revenue-generating capacity of a consumption tax.
Those six-tenths of a penny on the dollar raise $262 million each year.
The only change Dayton has proposed for individual income taxes is an increase.
He wants to raise taxes for the wealthiest Minnesotans by 17 percent. His revenue commissioner, Frans, is careful to distinguish Dayton’s plan from those of his GOP counterparts.
Abolishing the income tax is not in the cards, Frans said, because that would be “too regressive.” Dayton instead intends to structure Minnesota’s tax system so the three sources of revenue — sales tax, income taxes and property taxes — share the load more evenly. In 2010, only 27 percent of Minnesota state revenue came from sales taxes. Under Dayton’s proposal, by 2015 that share would grow to 32 percent, nearly creating an even three-way split.
Dayton’s goals are not Bobby Jindal’s, but his payment plan is the same: more sales tax. The strategy’s been popular lately.
“I think this trend is what’s going to happen in the future,” Frans said. “We’re just seeing it happen pretty quickly in a number of states of different political persuasions.”