Americans are a hard-working bunch and should keep what they earn. Our ideas for tax reform reduce the burden of taxes while ensuring governments have the resources to focus on core responsibilities.
With all of the scrambling at the Capitol to finalize a budget before the clock ran out on the fiscal year last night, one particularly good idea bubbled up out of the morass--converting Arizona's income tax from a graduated system to a 2.8 percent flat tax by 2012.
The best possible tax code for Arizona is one that is neutral, broad based, transparent, and with rates that are as low as possible. Last year, the Speaker of the Arizona House Kirk Adams and Representative Rick Murphy led an effort to move in that direction by eliminating tax exemptions, exclusions, and credits in exchange for lower rates across-the-board. Under these principles, there would be fewer disruptions in the private economy, less corporate welfare, and a broader tax base.
Tax Freedom Day for Arizona this year was Easter Sunday. According to the Tax Foundation, that’s the day by which Arizonans have earned enough money to pay their total 2010 tax burden. After 94 days or 26 percent of the year has passed, the average Arizonan finally gets to work for himself! Well, sort of.
The House Natural Resources and Rural Affairs Committee recently modified Senate Bill 1154 with a “strike-everything” amendment that seeks to increase the state’s gasoline tax. Some years ago, a "temporary" tax of 1 cent per gallon was passed to help clean up leaky underground gasoline storage tanks. That tax is scheduled to end in 2013. SB 1154, as amended, would extend this tax for another five years.
Proposition 100 supporters are touting estimates from economists at the University of Arizona and Arizona State University. They claim an 18 percent increase in the state’s sales tax would cost fewer jobs than the number of jobs that otherwise may be lost due to reductions in the government spending.
State finances will be in worse shape in 2014 if the proposed 18 percent increase in the state sales tax passes on May 18, according to long-term projections by the Joint Legislative Budget Committee. With Proposition 100’s passage, the deficit in 2014 would be almost $1 billion. Without Prop. 100’s tax increase, the projected 2014 deficit would be $200 million.
Suppose the state of Arizona gave taxpayer money directly to companies in certain industries as an incentive to locate here, with payments based on how much workers were paid and whether health benefits were offered.
Tax revenues would have to be raised or diverted to pay for this program. Government bureaucracy would be created to make sure businesses comply with the program’s requirements. Consequently, the economy would be partially transformed according to the preferences of government officials.
Arizona’s policymakers will face a huge challenge after today’s election results are tallied. The state’s structural budget deficit, or the amount that yearly spending exceeds yearly revenues, is in the neighborhood of $1.8 billion. That’s $720 a piece for the typical Arizona household. We’ve already seen record tax increases, mortgaged assets and every possible accounting gimmick to keep the state out of bankruptcy. But still, we’re deeply in the red.
I recently suggested the state should abolish its income tax. So what should replace the $2.2 billion in income tax revenues that the state receives each year? The answer requires a clear understanding of the role of income taxes in our economy.
The central issue in taxation is to do the least harm while bringing in enough money to fund core government programs. Income taxes are essentially a tax on what people produce in either goods or services. Businesses and individuals are discouraged from producing more and hiring more employees to avoid paying more income taxes.
I recently proposed that Arizona abolish its income taxes and replace them with sales taxes that reach more goods and services. I received many emails from people concerned about how this change would affect families with lower incomes.