Senior Vice President for State Fiscal Policy
This year's state tax debates have revealed a very important flaw in how states typically make tax policy. Fortunately, it's a flaw that can be fixed.
In most states, policymakers lack sufficient information on how tax changes will affect the after-tax distribution of income. The solution is straightforward: states should be required to publish such information before lawmakers vote on big tax changes.
The distribution of taxes matters because wealth and income in most states are increasingly concentrated among a small number of households — and that, in turn, has major consequences for society and the economy. Most state tax codes today exacerbate these inequalities by taxing low- and middle-income families more heavily as a share of their incomes than high-income families. In a few states, like Florida and Washington, the poor pay up to six times as high an effective tax rate as the wealthy.
It's a particularly relevant topic today because inequality has worsened rapidly — and several states have considered tax changes this year that would make it grow even more. These include proposals in states like Kansas, Louisiana, Nebraska, North Carolina, and Ohio to cut income taxes and raise sales taxes. Income tax cuts largely help the wealthy, while sales tax increases take larger shares of income from the poor and middle class, thereby shifting the overall responsibility down the income scale.
We've long argued that before a state votes on a major tax proposal, it should publish a careful, official analysis of how the proposal will affect taxpayers of different income levels. Only three states — Maine, Minnesota, and Texas — produce such analyses now; Minnesota’s model this year helped make the case for a significant tax proposal that — unlike the proposals in many other states — reduced income inequality. For the remaining 47 states, one independent national organization, the Institute on Taxation and Economic Policy (ITEP), operates a computer model that allows it to conduct such analyses, but public agencies within those states do not. (At the federal level, both the Treasury Department and Congress' Joint Committee on Taxation conduct such analyses of federal tax proposals, as do ITEP and the independent Brookings-Urban Tax Policy Center.)
North Carolina's current tax debate shows why it’s so important to have an official public agency conduct high-quality tax incidence analyses. The North Carolina legislature is considering big tax changes to cut income taxes and raise sales taxes. Both the House and Senate proposals under consideration involve billions of dollars in tax shifts. Yet, no state agency has the capacity to fully analyze how the proposals would affect the state as a whole. In fact, a brief analysis of one of the proposals by the state’s legislative research agency — conducted in response to legislators’ legitimate interest in information on the consequences of the tax plan for different families — created new confusion because it failed to provide a full picture.
There is a solution. The 47 states that do not now analyze how tax changes will affect after-tax income distribution can build this capacity, following in the footsteps of Texas, Minnesota, and Maine. Such modeling wouldn’t limit the kinds of tax changes that states could make, but it would improve the quality of information that policymakers have at their disposal. And it would increase voters’ ability to hold legislators accountable for the distributional consequences of their votes.
States shouldn't wait until major tax proposals are on the floor of the legislature to realize that they need this capacity. Rather, they should pass legislation soon to build the capacity — so that they have it when they need it.