Income Tax Reform Proposals Becoming More Popular
Washington, D.C., June 15, 2012—Although states have historically been averse to raising income taxes during economic downturns, the most recent recession saw many states attempting to raise more revenue by enacting income tax hikes, especially on high earners and millionaires, according to a new analysis by the Tax Foundation.
In the past, state lawmakers facing budget shortfalls have tended to gravitate toward the more politically attractive toolbox of options that Illinois and California in particular have used, such as furloughing employees, moving payments into the next fiscal year, increasing withholding, raising fees, imposing excise taxes like cigarette taxes, and just not paying bills.
Over the past few years, however, states like New York, New Jersey, Connecticut, and Maryland have been prominent in passing higher taxes on high income residents. Some of those have been permanent changes, while others were enacted as short-term policies. These rate hikes hit a peak in 2009, with fewer enacted over the past couple of years, including a few that have already expired.
The trend may be new, but the policy has been tried before. Through the early 1990s, several states maintained double-digit income tax rates, including California and Hawaii. These rates came down due to a combination of booming tax revenues from all sources and growing expert understanding that location decisions of highly mobile entrepreneurs are sensitive to state income tax rates.
“A millionaires’ tax is poor policy: it is a narrow, high-rate tax on a highly mobile group of people who earn less in bad economic times, and the spending such a tax increase supports leads to voters benefitting while concluding that someone else is paying for it,” said Tax Foundation Vice President of Legal & State Projects Joseph Henchman.
Tax Foundation Fiscal Fact No. 313, “Trend #1: ‘Millionaires’ Taxes on High-Income Earners” by Joseph Henchman is available online.
Read about all of the Top 10 State Tax Trends in the Recession and Recovery here.
The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.
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