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Busting the Myths Around Swapping Sales Taxes for Income Taxes

GovBeat, the Washington Post’s must-read new blog, earlier this week described the goal of North Carolina’s Senate Finance Committee Chairman Bob Rucho and House Speaker Thom Tillis to repeal the state income tax and enact a new, higher sales tax on both goods and services in 2015.  In explaining the plan, Rucho and Tillis repeated the three main myths that tax-cut proponents are using to justify swapping out state income taxes for sales taxes.

Let’s explode those myths, one by one.

Myth:  Replacing a state’s personal income tax with a sales tax would solve the problem of tax instability.

Reality:  A sales-for-income tax swap would reduce revenue without eliminating volatility. State tax volatility is a real problem, but much better, and more affordable, solutions exist.

Myth:  Repealing the income tax would result in lower taxes.

Reality:  Higher sales taxes mean higher taxes overall for middle-class and poor families. Rucho’s proposed tax swap would benefit only the wealthy.

Myth:  Repealing the income tax will boost state economic growth.

Reality:  States with the biggest income tax cuts in the 1990s grew fewer jobs in the next economic cycle than other states. Most careful economic studies show that income tax cuts are a lousy strategy for economic growth.

As states slowly emerge from the Great Recession, they can ill afford to change their tax systems based on such hollow myths.  That’s especially true in North Carolina, where lawmakers have already adopted policies that may hurt the state’s future prosperity.