WalletHub posted an article about 2019’s Tax Burden by state and asked expert and Huizenga College of Business and Entrepreneurship professor, Andrew Felo, PhD, CFE, CMA, CFM to weigh in on the subject.
What state and local tax instruments are most fair? Least fair?
Having people pay for services they use (use taxes) is theoretically the fairest tax system. This is because people only pay for what they actually use. This is not feasible for a large percentage of government spending, though. For example, how do you determine how much an individual uses the Police Department? Many state and local governments use property taxes and income taxes. These tax systems operate under the assumption that those who receive more benefits from the government should pay more for those benefits. The thinking is that those with higher property values or income receive more benefits from government services such as roads, schools, police, and fire protection. They also enable governments to “spread the burden” of raising money without trying to determine how much individuals use government services. Sales taxes are also popular with state and local governments. I believe they are the least fair as they often result in lower-income people paying a higher percentage of their income in taxes than higher-income people pay. This is referred to as a regressive tax system.
What’s the relationship between state tax burden and economic growth?
In general, states with lower tax burdens grow faster than states with higher tax burdens. Lower tax burdens are more attractive to prospective employees, making it easier to attract talent. Lower tax burdens often indicate less government regulation, which typically leads to higher economic growth. There are some exceptions, though. Certain parts of California and New York are experiencing above-average growth despite heavy tax burdens.
Should states and localities tax property at different marginal rates like income?
This would be difficult to accomplish since property is much more difficult to value than income. As a result, it would be very subjective whether a property ends up being taxed at a higher or lower marginal rate. Using a single rate avoids this problem.
What makes some state and local tax systems better able to weather economic downturns?
A broad-based tax system is more likely to weather economic downturns than is a narrow-based system. A broad-based system is one where the total tax liability is spread over a larger number of taxpayers while a narrow-based system is one where the total tax liability is spread over fewer taxpayers. New York Governor Andrew Cuomo recently illustrated this issue when he complained about high-earning residents leaving New York because of higher taxes. Since New York relies on relatively few tax payers for a majority of its tax revenue (a narrow base), this results in a significant drop in revenue. More importantly, though, is the amount of spending that takes place regardless of economic conditions. Having a large amount of spending that occurs regardless of economic conditions makes it difficult for state and local governments to weather economic downturns.
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