The Reason for State Budget Collapses: Tax Cuts

By | January 22, 2010

In a Washington Independent article, Martha White writes that tax cuts and reductions to federal expenditures are to blame for the collapse of state budgets:

A decade’s worth of cuts in federal aid combined with states moving to copy Bush administration tax cuts have led to states filling revenue shortfalls with regressive tax policies that disproportionately affect the poorest Americans.

The premise of the article is actually somewhat logical.  Sales taxes are not as progressive as income taxes.  Martha never makes that connection, instead, the article discusses how regressive sales taxes are.  An Emory professor piles on saying that:

“To the extent that states rely on sales tax, they’re going to be regressive,” said Howard Abrams, professor at Emory University School of Law, pointing out that the most regressive states in the ITEP report depend on sales and excise tax revenues to a great degree. Since poor individuals spend rather than save more — or all — of their income, sales tax as well as excise taxes on goods like gasoline and cigarettes..

As they say, statistics can be made to say anything.  Regressive taxation says that the rate of taxation decreases as income increases.  This article is so focused on only those taxes that affect the non-wealthy that it fails to recognize that taxes in this country are incredibly progressive (increasing in rate with income).  A few sources help us understand how progressive a system we have.  Wikipedia:

For example, a tax of 15% on all income earned up to $50,000, plus a tax of 25% on each dollar earned between $50,001 and $100,000, plus a tax of 34% of all income earned above $100,000. The United States currently uses increasing percentage rates.

How about the fact that the top 1% of income tax returns paid 40.4% of all taxes while earning less than 23% of the income.   It isn’t possible to have a regressive tax system where the ratio of taxation to income is so high at the upper-end.

If it were states with fewer programs and lower taxes that were having the largest financial problems, why are conservative (read: lower taxes and fewer programs) states the ones not that are facing ultimate failure.  California is in dire straights and one might argue that they spend more per capita on programs and I do not believe that anyone would say that they have a conservative taxation policy.

If we are serious about states avoiding cost overruns, we would be laying off state workers and deferring state costs at the same rate that everyone else is during the recession.

This article actually argues its’ own point.

Progressive groups are hopeful that the Obama administration will reverse some of these disparities by allowing provisions that cut taxes for the wealthiest Americans to expire next year and in 2011. While this wouldn’t directly change states’ tax structures, these changes to the federal tax code would create a healthier balance for poor as well as middle-class citizens.

This simply raises taxes on the upper end, it doesn’t reduce the taxation on low income-earners.  More slight-0f-hand by progressives.  They aren’t worried about what happens to the poor, they just need the rich to suffer.  Don’t control spending, just find a way to spend more (a.k.a. progressive taxation).

This new math is precisely why deficits are going through the roof.  This is another illogical justification for poor spending policies.  We should instead be cutting programs to fit into affordable budgets, instead of throwing out populist complaints about taxation policy.  Seriously Martha, don’t bother with the facts… they are just too concrete for you.

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One thought on “The Reason for State Budget Collapses: Tax Cuts

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