States Debate: Income or Consumption Tax

Not far from narrowly winning reelection, Governor Paul LePage rocked Maine’s political establishment earlier this year when he proposed slashing income tax rates and offsetting lost revenues by increasing and expanding sales taxes.

His goal: eliminating the state income tax altogether. “It is a pay raise of all working Mainers,” he told lawmakers during his State of the State speech.

Maine Governor Paul LePage wants to shift the state’s 
tax system from a reliance on the income tax to 
consumption-related taxes.

LePage is one of several Republican governors seeking to radically reshape their states’ tax systems, shifting them from taxing income — what people earn — to consumption — what people spend. The proposals are reigniting the debate over which is the best and fairest way to raise revenues without harming the economy, creating huge budget deficits, cutting critical government services, and exacerbating income inequality.

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It is a debate that will almost certainly play out in the upcoming presidential campaign and eventually in Washington, where the issue of tax reform is already simmering.

Consumption tax supporters say such a system encourages people to work, save, and invest, leading to stronger economic and job growth. Opponents, however, say sales taxes fall most heavily on low-income families, who must spend higher proportions of their earnings; expand the gap between rich and poor; and hurt an economy driven by consumer spending.

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“Ultimately, this is reviving the longstanding debate about what’s more fair — income taxes or consumption taxes,” said Alan Viard, a resident scholar at the conservative-leaning American Enterprise Institute in Washington, D.C. “It’s been interesting to watch.”

In Kansas, Louisiana, Ohio, South Carolina, and other states where Republicans control the governor’s office and at least one legislative chamber, lawmakers are considering plans similar to those of LePage. The Maine governor has proposed slashing the 7.95 percent income tax rate to 5.75 percent, raising the sales tax to 6.5 percent from 5.5 percent, and extending it to cover services from accounting to haircuts.

Ohio Governor John Kasich has pushed for a 23 percent 
cut in income taxes over two years while raising the 
state’s sales tax to 6.25 percent from 5.75 percent.

In Ohio, Governor John Kasich has pushed for a 23 percent cut in income taxes over two years while raising the state’s sales tax to 6.25 from 5.75 percent. In South Carolina, Governor Nikki Haley is demanding a cut in the state’s income tax in exchange for raising the gas tax. Governor Sam Brownback led the charge in Kansas to slice the top income tax rate by about 30 percent while Louisiana’s governor, Bobby Jindal, pushed through the largest income tax cut in that state’s history.

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