There has been much chatter of late about various states, Louisiana, Nebraska and North Carolina, to name a few, considering the repeal of their personal and corporate income tax statutes. As you might expect, the idea engenders strong opinions from its supporters and its detractors alike.
Although many of the details of state income tax elimination plans are yet to be released, it is clear many of the tax elimination plans include increases to or adjustments to the state sales tax via elimination of sales tax exemptions. Advocates of the changes say they would be revenue neutral. Taxes lost from eliminating income tax will be covered by increased sales tax revenue. Those opposed to elimination of state income taxes argue this will place a higher burden on those with lower income and magnifies by a large margin the inherently regressive nature of sales taxes.
Supporters of income tax elimination argue it will make their state more attractive to individuals and businesses and encourage them to relocate to that state. This further helps the push for revenue neutrality. A lower rate on a broader base can, of course, equal the revenue of higher rates on fewer people and businesses. New businesses would also bring other benefits like jobs.
Looking deeper into the nature of a shift to sales taxes from income taxes is more broadly defined as a shift from an income tax structure to a consumption tax structure. From time to time this broader dimension is talked about on a national level. Although the differences between an income vs. consumption tax system can get quite complicated, the briefest explanation is that consumption tax system avoids the taxing of savings and investments and these over time create more income to be taxed on a long term basis. Said another way, the consumption tax system lets the individual to decide how to invest excess assets whereas the income tax system provides for the government deciding how to invest excess assets. Put another way, income tax systems let the government decide how to invest in the state and a consumption tax structure gives that power to individuals—which is likely to be the better decider is, of course, a subject of debate.
In general, those in favor of consumption (sales) tax plans over income tax structures tend to be more focused on the shorter term goals of bringing new businesses and jobs to their states and reducing the tax burdens of their citizens, while advocates for an income tax model often speak more to longer term investments.
For more information on this or other tax law matters, contact Horowitz Law Offices.