2013: The year of tax reform
Policy and political circles are now both talking about the prospect of comprehensive federal tax reform next year. From Capitol Hill to Wall Street to Main Street, people are asking how this reform will be structured. They should look to states across the country for their model. Many are due to embark on sweeping overhauls, even complete rewrites, of their tax codes in 2013.
Lawmakers in numerous state capitals are now poised to introduce major tax reform when they come back into session early next year. As we’ve seen with other policy matters, reforms that percolate in the states often make their way to Washington. More than half of all state governments are controlled by one political party, so it’s likely that state lawmakers will move far more quickly than the folks on Capitol Hill. What these state legislators do will provide a preview of and parallel the debate in the new Congress.
Consider North Carolina. Republicans took control of the General Assembly in 2010 for the first time since Reconstruction, and next month the Tar Heel State is likely to become the 26th state where Republicans control the governor’s mansion and both chambers of the state legislature. The Republican gubernatorial nominee, former Charlotte Mayor Pat McCrory, has said that tax reform will be a top priority if he is elected, which appears likely given his double-digit lead in the latest polls. The state now has one of the nation’s least competitive tax regimes. But based on proposals being discussed at the capitol, North Carolina lawmakers next year could enact one of the boldest and most pro-growth state tax reforms in history.
Reducing and possibly eliminating the state personal and corporate income tax, both now the highest in the Southeast, is also a top priority for many in the legislature. In North Carolina’s final gubernatorial debate last week, McCrory reiterated his intention to provide personal and corporate income tax relief. Legislative leadership and McCrory have made clear that any tax reform would be revenue neutral.
This is the same commitment that Republican presidential nominee Mitt Romney has made at the federal level. It’s an important marker to lay down, since it tells spending interests that tax reform will not be used as a Trojan Horse for raising taxes.
North Carolina is not alone in pursuing pro-growth tax reform next year. Louisiana Governor Bobby Jindal is also planning for it. And, as a governor, when Jindal sets out to do something, he gets it done. This year, for example, school choice and pension reform were his top priorities. By the end of session, he had signed bills that improved the solvency of the state pension system and created the nation’s second-largest school voucher program.
Jindal has already announced that his top priority for the 2013 legislative session will be tax reform.
Though details of the plan are still coming together, in recent public statements Jindal has sketched an outline for reform that would lower rates and broaden the base by eliminating some preferential tax treatment. The direction that Jindal would like to take the tax code could, like the reforms being discussed in North Carolina, make for a more efficient tax code and also improve Louisiana’s economic competitiveness.
As Jindal’s Departments of Revenue and Economic Development explained in a joint report last month, “A broad base with low rates and few exemptions makes it easier for taxpayers to understand and comply with the tax system and for the state and local governments to administer it.”
While personal income tax relief puts more money in the pockets of individuals and families, it also increases the job-creating capacity of small businesses, many of which, as sole proprietors or partnerships, file under the personal income tax system.
At the same time, it is wise for states to reduce and move to eliminate their corporate income tax, one of the most economically damaging levies, and one that doesn’t even generate that much revenue for states.
On average, states get a paltry 3 percent of general fund revenue from corporate income taxes. Most states could easily offset the elimination of their corporate tax through broadening of the sales tax base or modest spending restraint. Both would make a state more attractive to potential employers and investors.
It’s not just Louisiana and North Carolina. Lawmakers in a host of other states, including Oklahoma and Mississippi, are also developing plans for major tax reform in 2013.
It could help their economies. As Harvard economist Dale Jorgenson recently explained to Congress, rate-lowering federal tax reform would provide an economic boost, increasing long-term U.S. output by $7 trillion, he approximates. Similarly, state lawmakers can stoke economic growth where they live by crafting revamped tax codes that make their states more competitive regionally, nationally and globally.
While a number of states are due to compete next year to see which can implement the most pro-growth tax reform, Democratic-dominated states — including Illinois, California and Connecticut — are moving in the opposite direction. They are raising rates and shrinking the tax base, with disastrous results for their state coffers and economies.
It might appear as though Governors Jerry Brown of California and Pat Quinn of Illinois are driving their state economies off a cliff. But remember that no governors or states are total failures — some just serve as bad examples.
The tax reform battle on Capitol Hill next year will get most of the media attention. But keep an eye on the states: Major tax showdowns are set to take place in numerous state house Gucci gulches in 2013.
PHOTO: Louisiana Governor Bobby Jindal, speaking during the Republican Leadership Conference in New Orleans, is planning a major state income tax overhaul next year. Sean Gardner / Reuters