PLAN, ITEP have overly simplistic approach to tax policy
The Progressive Leadership Alliance of Nevada is promoting a new study from the left-leaning Institute on Taxation and Economic Policy based in Washington, DC. ITEP regularly produces rankings of the state tax systems, with those tax structures that are more progressive receiving higher rankings. Not surprisingly, then, ITEP's standard recommendation is that states should either implement or expand the relative importance of a progressive income tax. This makes Nevada and other states that impose no personal income tax a favorite target for ITEP.
Apparently the analysts at ITEP have missed an important characteristic of the seven states that impose no personal income tax (Nevada, Florida, South Dakota, Texas, Tennessee, Washington and Wyoming): growth in these states has far outpaced the national average over the past few decades. Personal income taxes that more punitively penalize highly-productive workers discourage those individuals from working or can encourage them to relocate to states that do not have progressive income taxes. Penalizing high earners also impinges on capital accumulation which prevents gains in labor productivity - leading to welfare losses across all income brackets.
The unilateral focus that ITEP places on progressivity causes their analyses to lose sight of some important aspects of tax policy that should not be overlooked. Tax policy has a direct impact on economic performance and can affect economic decision-making through several dynamic channels. An optimal tax structure should seek to accomplish four primary goals: (1) ensuring economic efficiency by minimizing tax-induced distortions in economic behavior; (2) minimizing compliance costs through simplicity; (3) minimizing volatility; and (4) ensuring vertical and horizontal tax equity.
ITEP's recommendations essentially discard the first three of these goals in order to accomplish a portion of the fourth - vertical tax equity. This is not good tax policy. (A forthcoming policy study by NPRI will demonstrate how it is possible to achieve all of these objectives.)
One of the primary selling points that ITEP uses for its simplistic recommendation is the promise that state taxpayers would pay less in federal taxes - even if they pay more in state taxes. This is because state tax payments are deductible on federal income taxes.* Yet, the impact that tax policy has on economic performance will exist regardless of which level of government receives the tax.*Deductions are different than tax credits. A deduction means that the gross adjusted income upon which the tax is assessed can be reduced. It does not mean that the taxpayer receives a one-for-one credit on their federal return for state taxes paid. Hence, there would still be a significantly larger overall tax burden even though federal share would be slightly less.
