The tax debate in states over the past few decades has been largely centered on how high or low taxes should be. This is an important concern; but recently the conversation seems to have shifted to a debate about fundamental tax reform that alters radically how a state collects revenue.
The Midwest tax competition brewing between Oklahoma and Kansas is a perfect example. The first salvo in the battle against old-school, growth-sapping tax codes came from Governor Sam Brownback of Kansas when he proposed a dramatic reduction in that state’s income tax rates. It’s the first step in an overall goal of phasing out the income tax altogether. Meanwhile, Governor Mary Fallin of Oklahoma proposed a plan to phase-out the income tax in her state over the next decade.
Two versions of Gov. Fallin’s plan passed the legislature, but unfortunately for Oklahomans, hit a snag in negotiations to iron out the details. The resulting compromise did reduce income tax rates, with the top rate dropping from 5.25 to 4.8 percent. Kansans received a substantial tax cut too: a version of the governor’s plan passed and income tax rates in that state will fall. The top rate alone will drop to 4.9 percent from nearly 6.5 percent in 2013. Both governors are planning to take another run at getting rid of the income tax in 2013 or at least cutting their income taxes even further.
This is a competition that Arizona ignores at its peril. The nature of our modern economy means that we need to make our state more attractive than all others, and ample empirical evidence shows that states without income taxes do vastly better economically than those with income taxes. Residents of states like Texas and Florida see the fruits of these economic realities firsthand.
Arizona can still be a strong competitor in this tournament, but we need to get in the game quickly and make sure we approach it the right way. Eliminating the income tax in the next few years could make Arizona the first state to take that step in just over three decades. The choice is clear: it’s time to make history.
Goldwater Institute: A New Tax Plan for a New Economy
Goldwater Institute: The Hidden Cost of the Income Tax
Goldwater Institute: Tax Day Blues Should Lead to Thoughts of Reform