States eye tax hikes for high earners
“If you eliminate income taxes and increase the sales tax, you’re increasing the burden on low-income residents.”
Talk of tax hikes isn’t limited to Washington, D.C. Several states are also considering boosting taxes on their most prosperous residents.
Jay Inslee, the governor of Washington state, has proposed a 9% capital gains rate on gains of more than $25,000 ($50,000 for married couples).
New York Gov. Andrew Cuomo has proposed five new, higher tax rates for individuals who earn $5 million or more, with a top rate of 10.82%.
Minnesota Gov. Tim Walz has proposed a new top tax rate of 10.85% for couples with income of more than $1 million and singles with income of more than $500,000. Walz also wants to impose a capital gains tax of between 1.5% and 4% on profits that exceed $500,000, as well as reduce the state’s exemption from estate taxes.
Proponents of the tax hikes say they would help close budget gaps exacerbated by the pandemic. But critics say the increases could compel high earners to depart for friendlier jurisdictions.
“States like New York and Illinois are already suffering in terms of outmigration, and taxes have something to do with that,” said Katherine Loughead, senior policy analyst for the Tax Foundation. And as more employers allow their workers to do their job remotely, that trend could accelerate, she said.
Some states, eager to attract a newly mobile workforce, are proposing significant tax cuts. Governors in Mississippi and West Virginia also want to phase out their state’s income tax.
While scrapping income taxes could make a state more attractive to mobile workers and retirees, states still need to pay for roads, law enforcement and other essential services. West Virginia’s governor proposes a 1.5% increase in the state’s sales tax to make up for lost income tax revenue. That would put West Virginia in line with other no-income tax states, such as Tennessee, which rely heavily on sales taxes to pay the bills.
Critics of a Tennessee-style tax regime say sales taxes are regressive because everyone pays the same rate and low-income residents spend a higher percentage of their income on goods and services than high earners do. “If you eliminate income taxes and increase the sales tax, you’re increasing the burden on low-income residents,” said Richard Auxier of the Tax Policy Center.
Auxier also argues that families usually consider several factors when considering where to live, including the quality of schools, availability of broadband and updated infrastructure.
Critics of the race to lower taxes point to Kansas, which slashed its taxes in 2012. The governor at the time said the cuts would be offset by a boom in business development. But when the expected revenue failed to materialize, the state was forced to make deep cuts in spending on education and services.
Five years after the experiment was launched, the tax cuts were repealed.
— Richard Auxier of the Tax Policy Center