Tuesday, December 25, 2012

Civitas' immiserating tax scheme

Charge them for the lice
Extra for the mice
Two percent for looking in the mirror twice
Here a little slice
There a little cut
Three percent for sleeping with the window shut
Taking inspiration where it can (and probably recommending that the poor pay a tax for that too), the John W. Pope Civitas Institute has released an audacious proposal to reduce rich North Carolinians' payments by having everyone else pay more in taxes for food, medicine, and rent.

Specifically, Civitas recommends eliminating the personal income tax, the corporate income tax, and the franchise tax that North Carolina households and businesses currently pay and replacing these with
  • a higher (8.05 percent) sales tax which would be extended beyond the current tax base to cover groceries, insurance premiums, out of pocket medical expenses, residential leases, lottery ticket sales, and any service that is taxed in at least one other state (the proposal would also eliminate other exemptions and special rates in the current tax code but would exempt business expenditures on capital goods);
  • a business license fee; and
  • a real estate conveyance fee (a tax on commercial real estate sales)
Civitas claims that the change would be "revenue neutral," meaning that the new and increased taxes would bring in as much money as the taxes they are replacing. The claims of neutrality are suspect because the revenue figures that Civitas uses are $750 million less than what the state actually took in. Let's assume, however, that the final proposal is revenue neutral.

Under a revenue neutral tax reform, some households and businesses will pay less, while others will pay more. The reform shifts the responsibility of paying taxes from one group to another.

For this particular proposal, the responsibility would shift from rich households and prosperous corporations to poor households and smaller businesses. The tax system would lurch from being progressive (meaning that wealthier people pay a higher proportion of their income in taxes than poorer people) to regressive (meaning that poorer people pay a higher proportion of their income in taxes than wealthier people).

Civitas claims that this shift will actually be beneficial because "progressive income taxes (are) more harmful to growth." As evidence in support of this claim, Civitas compares "growth rates" for states with and without corporate income taxes and states with and without personal income taxes. It finds that states without the taxes experienced higher rates of economic growth.

Civitas provides almost no documentation for its figures besides saying that they are based on data from the Bureau of Economic Analysis (BEA). An analysis of the BEA data, however, indicates that the Civitas claims don't hold water.

The "headline" measure of state economic growth that the BEA uses is real (inflation-adjusted) gross domestic product (GDP), an estimate of the value of goods and services produced within the state. For instance, Civitas claims that average annual growth from 2002-2011 was half a percent lower in states with a personal income tax than in states without such a tax (1.7 percent growth vs. 2.2 percent growth). There is some question regarding which states do and don't have personal income taxes. Seven states (Alaska, Florida, Nevada, South Dakota, Texas, and Washington) definitely do not have personal income taxes. Two other states (New Hampshire and Tennessee) only assess personal income taxes on certain types of income, such as dividends or interest. For the present analysis, I computed the annual changes in real GDP for 2002-3, 2003-4, ..., 2010-11, averaged the annual changes for the first seven states, and averaged the annual changes for the remaining 43 states (omitting the District of Columbia). Doing this reproduces Civitas' 2.2 percent average annual growth figure for the no personal tax states but only produces a 1.5 percent growth figure for the other states. These comparisons are more favorable to Civitas' argument than others (such as including DC or treating NH and TN as no-personal-income-tax states), so I'll continue with them.

There are a number of problems with Civitas' analysis. For one thing, Civitas does not adjust its GDP figure for population growth. Redoing the comparisons using real per capita GDP reveals that economic output per person grew slightly more in the personal-income-tax states (0.7 percent per year) than in the no-personal-income-tax states (0.6 percent per year).

Civitas similarly fails to account for the fact that three of the seven no-personal-income-tax states are major oil and gas producers that have benefited from high energy prices over the last decade. Although oil and gas extraction accounted for only one percent of economic output nationally in 2010, it accounted for 16.4 percent of the output in Alaska, 14.2 percent of output in Wyoming, and 6.3 percent of output in Texas. Indeed, Alaska gets so much revenue from its oil and gas fields that it actually pays an annual royalty to its citizens.

Federal government military and civilian activity also accounts for a larger share of economic output in the no-personal-income-tax states than in the others, and federal military and civilian activities grew at a faster rate in the last decade in those economies than in others. For example, although federal civilian and military activities only accounted for 3.7 percent of state economic output nationally in 2010, they accounted for 10 percent of the economic activity in Alaska and 5.1 percent of the activity in Washington. The state and local governments in the seven no-personal-income-tax states also get more intergovernmental revenue from the federal government (e.g., payments from the federal government to help the state and local governments operate schools and build roads) on a per capita basis than other states. Figures from an analysis by The Economist also reveal that the seven no-personal-income-tax states enjoyed a bigger net differential over other states between 1990 and 2009 in the receipt of federal expenditures over the payment of federal taxes. It's much easier to lower your state's tax rates when taxpayers from other states are footing so much of the bill.

Shifting more of the responsibility of paying taxes from those who have benefited from the economy to those who haven't is a cruel prescription, especially given the deprivations that poor families have faced over the last few years. However, it's crueler still to do this with no demonstrable benefit to the economy.

2 comments:

scharrison said...

Once again Civitas does a flip-flop, supporting something they were adamantly opposed to:

http://www.nccivitas.org/2007/taxing-american-dream-%E2%80%94-real-estate-transfer-taxes/

Steve Harrison

Dave Ribar said...

Steve:

:)

Dave