The Future of the State Personal Income Tax
Hy, Ronald John, Public Administration Quarterly
The concept of tax fairness has undergone a transformation in recent years. Increasingly, state residents are pressuring state officials to develop a tax structure that is fair, understandable, and growth friendly. The state personal income tax no longer meets these criteria. Using Arkansas as a case study, tax structure relying on sales and use taxes, the major component of consumption, is proposed and tested for feasibility.
State tax revenues which are as important to state governments as expenditures are raised by tax structures that are built on the principle that every person with a taxable income should pay their fair share of the cost of providing public services. Over the years, this concept of "fair share" has undergone a transformation.
Taxpayers are pressuring states to change their tax structures to better reflect the economic environment. This means that tax structures need to reflect the public's desires to increase personal and disposable income and the number of jobs, especially better paying jobs. Consequently, the state tax structure must be grounded in two concepts: (1) taxpayers' wishes and (2) economic growth.
State taxpayers increasingly want a tax structure that is fair, understandable, and growth friendly. Acceptable tax structures need to be grounded in the preferences of taxpayers. After all, a market economy is based on aggregate individual economic behavior. The economy reacts to aggregate individual economic preferences. Therefore, it is reasonable to assume that tax structures should also be based on individual preferences otherwise tax structures are merely revenue generating mechanisms and not an integral component of state fiscal policy.
Increasing taxes is objectionable during times of slow economic growth when real disposable income hardly increases. Buchanan and Flowers (1987:8) suggest that states are not "some organic or unitary being that acts independently of its citizens but rather as a means through which private citizens make decisions collectively." In practice, states often seem to have a life of their own, possessing a capacity to make decisions independent of its citizens. Nevertheless, states must consider taxpayers' opinions in order to continue to maintain legitimacy.
Most polls indicate that taxpayers think their tax burdens are a little high, have been rising, and are likely to continue to increase. Similarly, poll after poll shows that in recent years--at both the national and state levels--people have become to believe that flat rate taxes such as general sales and use taxes are fairer than graduated rate taxes like individual and corporate income taxes and that flat rate taxes are more likely to stimulate the economy.
For instance, since 1972 the Advisory Commission on Intergovernmental Relations (1991:3) has polled Americans to find out which tax they consider the least fair.' Exhibit 1 shows a continuing trend that indicates that Americans find a flat rate tax less objectionable than a graduated rate tax.
This neoteric shift of opinion about which type of tax is most fair is founded on the belief that, under the current tax structure, "the harder people work, the more they are taxed." Polls also suggest that state officials are starting to seriously consider and implement the public's view of tax fairness.
A desirable tax is one that taxes everyone. However, whether a tax is fair or not depends upon "whose ox is gored," that is, who benefits and who loses. In a pluralistic political economy such as ours, there is no one agreed-upon objective standard of fairness because such a standard depends upon the values of the group doing the measuring. Every tax benefits and hurts some more than others. Some people argue that everyone should pay the same percentage of tax regardless of their income; others reason that, as income rises, one should pay a higher portion in taxes, and there are other views. …