Creative Politics: Taxes and Public Goods in a Federal System

4. Read Our Lips, No New (Income) Taxes

Chapter 4 Read Our Lips, No New (Income) Taxes The federal Tax Reform Act of 1986 offered state governments an incentive to utilize personal income taxes and to decrease their reliance on sales taxes. By maintaining a deduction for state and local income and property taxes and eliminating the deduction for sales taxes, Congress sustained a subsidy of a particular subnational tax while eliminating another. Since 1986, however, only Connecticut has adopted a personal income tax, and the trend among state governments has been away from income taxes toward sales taxes (Gold 1990). State legislators’ have several perceptions about why state governments have not responded to the federal incentive for income taxation. Although the 1986 Tax Reform Act encouraged states to adopt income taxes, other federal policies, such as wage tax increases, and the persistent federal politics decrying income taxes created a political climate in which state representatives found it dif‹cult to even propose increases in income tax rates (Steuerle 1991). In states with and without an income tax, representatives’ aversion to income tax increases illustrates how the political costs of a speci‹c policy change can override the objective economic and distributional bene‹ts of the same change. In every state, representatives explained that although they supported progressive income tax increases as a matter of principle and as a matter of economic equity among their constituents , the political ‹restorms that could result from such tax increases and their subsequent political costs simply made them too risky. With tax policy, legislators perceived that the political costs of taxing according to ability-to-pay principles were likely too high. Consequently , legislators proposed and enacted more obscure tax increases in sales and “hidden” business taxes in the wake of the federal income tax increases in 1990 and 1993. Legislators’ arguments against income taxes focused on citizen dis46 dain for federal income and wage taxes and suppositions that state legislators would continually increase income tax rates. Most representatives perceived that constituents resisted sales taxes less than income taxes because of the obscurability of the former. Other arguments favoring sales taxes identi‹ed their universal incidence and horizontal transferability. In the case of obscurability, legislators framed their arguments in terms of not overtaxing working individuals via income taxes. With respect to horizontal transfers, legislators argued that sales taxes paid by nonresidents alleviated tax burdens for residents. Legislators perceive that their constituents loathe income taxes and believe support for income taxes indicates support for “big government.” Many suggested that their constituents felt taxes were as high or higher than at the start of the 1980s despite decreases in federal income tax rates in the early 1980s, substantial reform in 1986, and two presidential campaigns in which the winning candidate ran strongly opposed to new or additional taxes. Income taxes have thus become a political target for citizens who are disgruntled with government and seek a political outlet for their frustrations . With New Jersey’s enactment of a substantial income tax increase and the federal enactment of an income tax increase in 1990, income taxes became the “powerful condensation symbol” for various complaints against government (Edelman 1964, 172). Politicians have responded by attempting to reduce income taxes and by not increasing income tax rates even when their states’ ‹scal conditions are dire. The con›ict for state legislators requires balancing funding needs with a political desire to lower income taxes. Consequently, state legislators have declined to utilize an avenue of federalism available to them by choosing sales and excise taxes that cannot be deducted from federal income taxes. Representatives’ perceptions about citizen distrust of taxation ‹nd support in public opinion data. A 1993 Gallup Poll reported that 50 percent of citizens thought federal income taxes would be raised unfairly, while 42 percent felt taxes would be increased fairly. Sixty percent of the respondents did not believe that the money raised from a federal income tax increase would be used to reduce the de‹cit despite pledges by President Bill Clinton and members of Congress to do so (Gallup 1994, 235). Paradoxically, 75 percent of the respondents supported increasing taxes on incomes greater than seventy-‹ve thousand dollars yet demonstrated little support for any tax increases or faith that such increases would be used for their intended purposes. The resistance to income taxes is thus Read Our Lips, No New (Income) Taxes 47 rooted in the distrust that politicians will direct tax increases at...