Policymakers in states across the country are searching for solutions to unemployment and a faltering economy. The answers, though, are simple and within reach. Legislators looking for a bold economic growth strategy should seriously consider the benefits of unshackling state economies from the income tax—a tax that penalizes workers, creates double taxation, and inhibits investment.
A new tax structure can be revenue neutral while spurring economic growth. This combination is possible because the type of taxes a state imposes matter. By taxing wages, income taxes penalize work and dissuade investment and job growth. By contrast, a system of sales taxes encourages work and investment, eliminates tax loopholes, and reduces politicization of the tax code. Those changes help to spur economic growth and job creation.
Properly implemented, this strategy should accomplish the following:
- Eliminate personal and corporate income taxes by broadening the sales tax base to include all final goods and services.
- Set the top state sales tax between 4.6 percent and 5.6 percent. Allow local governments to levy sales tax rates only on the state base.
- Enact a constitutional amendment forbidding state and local government from reinstating an income tax in the future.
Arizona policymakers should set their sights on big ideas that move the state into a new era of economic growth. Only by moving Arizona away from penalizing income and investment through the tax code can policymakers hope to bring Arizona into that new era.
Eliminating income taxes as we know them is arguably the only policy proposal bold enough to dramatically boost new economic growth and drive widespread job creation. Revenue-neutral tax reform that eliminates the income tax could add one percentage point to the baseline private sector employment growth rate—an increase that amounts to more than 20,000 new jobs in the first year.
The faster policymakers can fundamentally reform the state’s tax system, the quicker we will reap the economic benefits.