Following Passage of State Income Taxes, Size of Government Increases
Americans for Tax Reform conducted research to see if the introduction of a state income tax leads to bigger state government. The most recent states to impose an income tax since 1967 are: Michigan, Nebraska, Connecticut, Illinois, Maine, Ohio, Pennsylvania, Rhode Island, and New Jersey. Looking at the 10 years before and the 10 years after implementation of a state income tax, we compared the size of state government (measured as state spending as a percentage of Gross State Product). The source of state spending and tax rate information is derived from the U.S. Census Bureau and Gross State Product figures are derived from the Bureau of Economic Analysis, Samuel H. Williamson, "The Annual Real and Nominal GDP for the United States, 1790 - 2013," and compilation at usgovernmentspending.com. The numbers show that the size of state government grew significantly faster in 10 years after imposition of the income tax than in the previous decade.
- The size of government grew 4.64 percent faster on average in the decade after these states imposed an income tax. State spending on average was 4.78 percent of GSP 10 years prior, 5.99 percent on average at the time of income tax implementation, and 7.25 percent 10 years after.
- Sans New Jersey, which is an aberration, the size of government grew 59.2 percent faster on average in the 10 years after income tax imposition compared to 10 years prior income tax. On average, government was 5.04 percent of GSP 10 years before the income tax, 5.92 percent at time of income tax implementation, and 7.33 percent 10 years after imposition.
- Additionally, five of these nine states introduced a corporate income tax the same year: Michigan, Nebraska, Illinois, Maine and Ohio. Not surprisingly they saw the largest average growth in size of government.
- Most of the states increased their tax rates 10 years after the income tax was introduced. This trend is similar to what was seen following passage of the federal income tax. The top tax bracket originally was 7 percent in 1913, swelled to 94 percent in the mid 1940s and currently sits at 39.1 percent.
- Comparing spending in states with an income tax to those without, state spending per-resident was 49 percent greater in 2012 in states with an income tax. Average spending per resident was $2,491 in states without an income tax, while spending reached $3,702 per-resident in states with an income tax.
- New Jersey, an aberration, introduced its income tax in 1976, at the end of the 1973-75 recession. The recession caused an additional increase in government spending followed by a temporary slowdown at the recession’s end by most states; New Jersey was no different. 10 years prior to passage of its income tax in 1966, New Jersey implemented a sales tax and witnessed a boom in tax revenue- increasing 125% (adjusted for inflation) to 826 million in 1976, paralleling New Jersey’s 138% increase in the size of state government. Unlike New Jersey, none of the other states introduced a sales or corporate tax in the ten years prior to the income tax.
In conclusion, size of these state governments grew at a greater rate following the institution of a state income tax. Additionally, once in place, these tax rates also tend to rise over time. When a new source of revenue is introduced, it is often abused by state spending addicts and only pumps into government faster. As Milton Friedman stated best, "Politicians will always spend every penny of tax raised and whatever else they can get away with."
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House Votes to Keep Internet Tax Free
Today the House of Representatives passed legislation to forever abolish taxation of Internet access and abusive electronic commerce tax rates. The Permanent Internet Tax Freedom Act (PITFA), H.R. 3086 provides a permanent ban to any duty on Internet access from state and federal governments and implements nondiscriminatory rates on e-commerce products and services.
In November, the Internet Tax Freedom Act , implemented in 1998, expires. This Act, which was created to prevent heavy tax burdens from federal and local governments and prohibit biased taxation of e-commerce, has been reauthorized three times. Passage of Permanent Internet Tax Freedom Act shows that the House is concerned about protecting constituents from money-hungry politicians.
The legislation now moves to the Senate. The Internet tax moratorium in the Senate has 50 co-sponsors, But some big government senators think the solution to this problem is another temporary extension, believing a future tax on Internet access could be a lucrative source of revenue.
Americans were not born yesterday. Without a permanent ban, Americans will see greedy state governments taking advantage of an opportunity for new revenue and worse, an opportunity to dip into our digital lives. Further, they could also see prejudiced tax rates on e-commerce, which are set at an average sales tax rate of 17 percent, 12 percent on video services, and 7 percent on general sales tax.
The Internet has flourished because elected officials have largely kept the government out. The Senate now must pass the Internet tax moratorium to keep it that way.
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ATR Urges PA Legislators to End State Liquor Monopoly, Balance Budget Sans Tax Hikes
While many states have finished up their 2014 legislative session, lawmakers are still busy at the state capitol in Pennsylvania working to reach a budget agreement before the the June 30th deadline. The biggest challenge facing the legislature is how to address the state’s $1.5 billion dollar deficit.
Gov. Tom Corbett came out earlier this month and stated that he wants legislators to balance the budget without higher taxes, and he has made clear that he doesn’t even want to consider tax increases before lawmakers address pension reform and get the state out the booze wholesale and retail business once and for all (Pennsylvania is one of only two states that controls alcohol wholesale and retail operations). Privatizing alcohol sales is good politics, with over 60 percent of Pennsylvanians supporting privatization, and it’s also good policy. As ATR’s Patrick Gleason pointed out in a recent Forbes column, ending the Pennsylvania government’s 80 year monopoly on liquor sales would provide enough revenue to enable lawmakers to balance the budget without raising taxes. The Pennsylvania House has already passed legislation, HB 790, to get the state out of the booze business. The only thing holding up this commonsense and long-overdue reform is a lack of political will in the state senate.
ATR recently sent a letter to Pennsylvania lawmakers encouraging them privatize liquor sales. “There are numerous ways to balance the budget without resorting to tax hikes, but one of the best and most fiscally sound ways to work toward that goal is to get the state out of the liquor and wine business,” wrote ATR president Grover Norquist to Pennsylvania lawmakers. “It is estimated that selling off the state run alcohol stores could generate as much as $1 billion in revenue for the commonwealth. Aside from serving as a great way to balance the budget without taking more of Pennsylvania taxpayers’ hard-earned income, privatization is a good idea because wholesale distribution and retail sales of liquor and wine are simply not core functions of government,” added Norquist.
In recent days it has been widely reported, and confirmed by sources in the legislature, that Republican senators are seriously considering passing a budget with higher taxes, with a tobacco tax increase and a severance tax on natural gas as the top tax hike trial balloons currently being floated. Spending interests at the Pennsylvania capitol are pushing to add as much as a 5% tax on shale gas, unconcerned by the fact that it will lead to, as Marcellus Shale Coalition President Dave Spigelmyer puts it, “uncompetitive, shortsighted new taxes on one of our most promising industries and will lead to fewer jobs, lower energy production and less tax revenues.” Others in the legislature, viewing smokers as an easier political target, prefer a tax hike on tobacco products.
One thing is clear, if the GOP-controlled Pennsylvania House and Senate adjourn for the summer having failed to end the state’s liquor monopoly or reform pensions, but having succeeded in raising taxes, they will have an extremely weak case to make on the campaign trail this Fall. Furthermore, if Republican legislators seek to steamroll Gov. Corbett into signing a tax increase five months before his reelection bid, in violation of his central campaign commitment to voters, Republican legislators will have given the perfect gift to the Democratic Governors Association and Democratic gubernatorial candidate Tom Wolf.
Pennsylvania taxpayers have been hit with over 20 federal tax increases in just the last four years, the last thing they need is another job-killing tax increase imposed from Harrisburg. ATR urges Pennsylvania legislators to get the state out of the liquor business once and for all and to balance the budget without higher taxes.
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The Real Texas Budget: Lots of Heat and Little Transparency
The Texas Legislative Budget Board (LBB) recently released “Fiscal Size-up: 2014-2015 Biennium,” a report that gave a comprehensive view of spending, appropriations, and budget plans that would be in place for the next biennium. However, thanks to the folks at the Texas Public Policy Foundation (TPPF), Texans have received an education on how the LBB does not accurately depict the growth in state spending.
Not only does the LBB fail to report how much the government is actually spending, they don’t know what the government is spending the money on. The “Real Texas Budget” released last week by TPPF, provides accurate numbers on how much Texas taxpayers are on the hook for. Key findings from the report:
Texas Legislature appropriated $44 billion more in 2013 than it did in 2011, a 25.8 percent increase.
Instead of the 5% spending increase reported by the LBB, there will actually be a 9% spending increase during the current biennium compared to the previous.
Government spending in Texas is increasing faster than the rate of growth in population and inflation, costing taxpayers nearly $16.3 billion over the next biennium compared to what would’ve been spent if lawmakers kept spending in line with inflation and population
This is not the first time the Texas government has increased spending in the budget. There was an increase in the last biennium, but it was done by backfilling, removing or shifting line items, and delaying payments to future budgets, which has only confused and misinformed taxpayers.
Due to inaccurate numbers, delayed budget releases (the first budget was not released till nearly 8 months after the legislature adopted the budget), and behind the scenes budget increases, there is a clearly a desperate need for a more transparent and accurate reporting on state finances.
Currently it is acceptable for budget data release to public to be delayed by months, giving room for mysterious behind the scenes backfilling and redirecting. As TPPF report points out, giving the public near real-time access to the budget would institute the level of transparency needed to improve stewardship of taxpayer dollars. Another solution offered by TPPF is program based budgeting, which displays each program with their revenues and expenses, as well as the source of funds per each line item listed. Texas uses a budget format that is confusing to even the quickest budget experts. Moving to program-based budget would decrease the issue of misleading line item shifting or payment delays. Fortunately, the introduction of bills for program-based budgeting has already begun.
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