Originally Published: April 17, 2012 10:56 p.m.
Well, it looks like the tax may hit the fan in October. The Legislature has passed a bill authorizing a committee to study state taxes, to be completed in October. That in turn will likely be used as rationale for cutting taxes for the top.
In fact, the bill originally had a clause about "the phasing out of the individual and corporate income tax and the broadening of the (sales) tax." Those clauses have been removed to make it seem more neutral, but it indicates the direction the authors want it to go.
The problem is state taxes are already upside down and the intent of the authors would only make it worse. To explain:
Suppose an upside-down income tax was proposed. By upside down I mean the lower your income, the higher your rate. If you have a million-dollar income you owe 4 percent. If you're a dishwasher with a $20,000 income, instead of owing a lower rate, you owe a higher rate. A much higher rate. Say 12 percent.
That's exactly the way total taxes in the state operate now. The income tax is slightly progressive, but what turns it all upside down are the many other taxes, which tend to hit low-income people harder. Especially sales tax.
Even people who are pretty good with finances have a hard time wrapping their head around this one, so don't take offense if I walk through this slowly.
Everyone thinks a sales tax is flat. It's 8 percent. Or close to that, depending on your area. So everyone pays, say, 8 percent. What could be more flat? Right? Except it's 8 percent taxed on money you spend. What if you don't spend all your money? What if you can afford to save a tenth of it? So you pay 8 percent tax on the money you spend, and no sales tax on the part you save.
Someone who makes less than you and can't afford to save anything must use it all just to get by and so pays 8 percent in sales tax on all of their income. (Some food and basics are not taxed, but it's not enough to change the picture.) You, on the other hand, pay 8 percent only on the money you spend, and pay no sales tax on the tenth of your money you save. If you calculate that you find, of your total income, about 7 percent goes to sales tax. That is, nine-tenths of your money is taxed at 8 percent, and one-tenth is not taxed. That averages out to about 7 percent of your income went to sales tax.
So you pay 7 percent, and someone with less income than you pays a higher 8 percent.
Suppose someone with more income than you or I manages to save most of what they make. So they pay 8 percent tax on the smaller portion that they spend, and no sales tax on the greater part, which they save. Calculate that out and you find that, of their total income, about 3 percent is paid in sales tax.
To look at this another way, suppose a "flat" 8 percent tax was imposed on, say, diapers. It's 8 percent no matter who you are, so that's a flat tax. Right? Obviously not. It's a tax on families with little children, and zero tax on anyone else. It's a tax that doesn't apply to everyone evenly. It's the same way with sales tax. Sales tax doesn't apply to everyone evenly because only some people have to spend all of their money. For them it's an 8 percent tax. For people who can save a little, it works out to 7 percent going to sales tax. The highest earners manage to save most of their income and for them it works out to about 3 percent going to sales tax. And that's not separating out the ultra-wealthy, for whom it's much less.
When you add all state income tax, sales tax, property tax, miscellaneous taxes, etc., together, the lowest-income people pay about 12 percent of their income in state and local taxes, while the highest-income people pay only about 4 percent. (See link to related story below.)
All of this brings up many questions, which I'll get to in future columns. For now there is one obvious point. You remember the phrase, "No taxation without representation" from your school books? Well here's what's obvious about any fair tax system: No tax rate higher than those above me. That should be a simple, obvious truth, whether you're a low earner, in the middle, or even above middle. You shouldn't be paying a higher total tax rate than those above you on the income scale. Right now that's not true. We're upside down. Severely upside down. And odds are you are paying the price, and have been paying that price in a big way for many years. I'll be writing more on this. Let your legislators know you're watching what they're doing.
Tom Cantlon is a longtime local resident, business owner and writer. Contact him at TomCantlon@TomCantlon.com.