Originally Published: August 7, 2012 9:52 p.m.
Continuing on the topic of how you're getting shafted on state taxes, here's some input on how to bring the system back into balance.
In previous columns, I covered how, in total, state taxes (state income tax, sales tax, property tax, typical local sales tax, etc.) are upside down. Because some taxes hit some people more than others, the top income brackets pay about 4 percent of their income in state taxes, the middle about 9 percent, and lower wage working people about 12 percent. The explanation for that, and a great deal of documentation from multiple sources to support it, are in my columns from April 18, May 16 and June 20.
Last time I mentioned that while I generally don't like "flat tax" schemes because they usually end up being harder on the middle and a break for the top, I would be happy to see state taxes merely get up to flat; no longer regressive or upside down. The major flat tax systems that have been proposed, while they are intended as national tax systems, can give us insights into ways to balance state taxes.
Most of the popular flat tax proposals are some form of sales tax or consumption tax. (A consumption tax is sort of a sales tax collected later.) One of the most popular is the "Fair Tax." Quite a list of conservative members of Congress backed a bill that would have implemented it. Our own representatives Trent Franks and Jeff Flake support it. Like every one of the major sales tax proposals, it acknowledges right up front that it's regressive; that the lower your income, the harder this is going to hit you.
To fix that flaw they all propose some kind of refund of part of the sales tax, structured to primarily help those on low incomes.
This is where I don't care for these schemes. That rebate helps the low end, and the high end usually comes out better than they are now in these systems, which leaves the middle having to pay more.
On the state level, we don't need big rebates, but there are two points here that apply. One, that every major proposal for a national sales tax acknowledges that sales tax is severely regressive. Two, that's not just some bleeding-heart, care-for-the-low-end policy. Conservatives often like flat taxes, and support for rebates to balance sales taxes is documented by many of the most conservative think tanks.
On the state level, we could achieve the same end with smaller steps. Almost every state has regressive taxes, Arizona being one of the worst. Of the few who come close to flat they tend to have two things.
One: More generous refunds on income tax to the low end. For instance the EITC (Earned Income Tax Credit) in a few states is refundable. It's targeted at low-wage workers. In most states, including Arizona, if that credit wiped out your state income taxes due, that's it. The state won't go negative and pay a refund. In some states they do pay a refund. It should be paid to those eligible for it because it is only a partial refund against other taxes they've already paid, like sales tax. If you don't think refunds should be paid to offset regressive sales tax, take it up with Reps. Frank and Flake. This simply emulates the popular, conservative flat tax system they support.
The EITC has flaws in that it doesn't help, for instance, retirees with no income, but the general idea could be adjusted to fix those flaws.
Two: States that come close to flat have more and higher income tax brackets. That's the opposite of the direction the legislature has gone in recent years, and they have tried or talked about going even flatter or eliminating state income tax altogether; moves that would make total state taxes even more regressive.
Before some get to screaming about soaking the rich, this is about everyone from the upper-middle on down has been getting soaked all along and simply ending that. If these suggestions were implemented in the right proportions, the goal is to get everyone paying about the same proportion of income, to get to flat. So instead of what I noted at the start, that 4 percent, 9 percent, 12 percent upside down situation, we get to everyone paying, say 8 percent.
The simple principle is: No one should pay a greater share of income than those above them. Right now, you are.
Tom Cantlon is a longtime local resident, business owner and writer. Contact him at TomCantlon@TomCantlon.com.