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Taxing High-Income Residents: Better than Budget Cuts, Better for Economic Growth

Taxing High-Income Residents: Better than Budget Cuts, Better for Economic Growth

After resisting the proposal for months, New York Governor Patterson has agreed with legislative leaders to raise income taxes on the wealthiest state residents in order to help close the state budget gap.  “It’s a profound breakthrough for tax fairness,” said Dan Cantor, executive director of the Working Families Party, an organization of New York individuals, labor unions and other groups that was a leader in the campaign to raise the tax rates.

As this Dispatch will outline, the New York deal is part of a national movement of state leaders looking to raise new revenue from high-income residents to avoid budget cuts and fund needed investments for long-term economic recovery.  Instead of listening to tired rhetoric about the wonders of tax cuts for economic growth, policy leaders across the country are instead paying more attention to the history of states where higher taxes on high-income residents and investments in public needs has led to stronger economic growth.  The rightwing anti-tax movement has been an increasing failure in recent years and no longer intimidates state leaders who are committed to achieving both economic growth and economic justice in their communities.


Table of contents

- Current and Recent Campaigns to Raise the Income Tax

- Why Tax Increases are Better than Budget Cuts in Addressing the Economic Crisis

- Economic Growth and Income Tax Rates

- Beating Anti-Tax Politics with Tax Fairness

 


Current and Recent Campaigns to Raise the Income Tax

New York's plan will raise an additional $4 billion per year by creating two new tax brackets.  Single filers who earn $200,000 to $500,000 and married couples whose combined earnings total $300,000 to $500,000 will be taxed at a rate of 7.85% and filers with $500,000 of taxable income will be taxed at a rate of 8.97%. Currently, the state's tax rate is 6.85% for everyone who earns more than $40,000.

Just in the last few months, other state leaders have also rolled out a wide range of proposals for new taxes on high-income residents:

  • Wisconsin: Wisconsin's governor has proposed a new tax bracket for individuals making more than $225,000 a year or couples making $300,000.
  • Connecticut: The Assembly's Finance Committee approved adding four new income tax brackets, with rates ranging from 6% to 7.95%, for married Connecticut residents with incomes over $250,000 annually (and single taxpayers with incomes above $132,500). 
  • New Jersey:  New Jersey is considering a one year increase in the tax on the highest end income earners to 10.25% from 8.97% and suspending the property tax deduction for better-off New Jersey residents. The proposal would raise an estimated $620 million to help close a $7 billion shortfall.
  • Iowa:  Iowa legislators are discussing a far-ranging proposal to reform and simplify their income tax code, including eliminating state income tax deductions for federal income taxes paid, which would increase income taxes paid by high-income taxpayers while the rest of the reforms would lower tax rates for low- and moderate-income taxpayers.  House Speaker Pat Murphy recently voiced his support for the changes and the Senate seems poised to act as well.
  • Delaware: Governor Jack Merkell has put forward a broad-ranging budget plan that would take the constructive step of raising Delaware's top income tax rate from 5.95% to 6.95% for residents making more than $60,000 per year, the first income tax increase since 1974.
  • Oregon: Among the proposals to address budget shortfalls before the House Revenue Committee is one to increase income tax brackets for individuals making $125,000 a year.
  • Washington: In a state that doesn't have an income tax, Senate Majority Leader Lisa Brown has raised the possibility of an income tax on high-income residents to close the state budget gap, potentially taking the issue to the ballot.

General increases in the income tax are part of budget proposals in California and Illinois. The California governor and Legislature agreed in February to raise the tax on all brackets by one quarter of a percentage point, a proposal which will be going to voters this Spring.  In Illinois, Governor Quinn has proposed increasing the state's income tax rate from 3% to 4.5% and tripling the personal exemption from $2,000 to $6,000. 

Recent "Tax the Rich" Campaigns:  A number of states in recent years have passed legislation to increase revenues through higher tax brackets for high-income earners:

  • New Jersey: Back in 2004, as New Jersey struggled with both a budget deficit and calls to lower the property tax burden, the state created a new 8.97% tax bracket for those making $500,000 per year or more. Only 30,000 households saw a tax increase, while 1.8 million households saw a tax cut.  
  • Maryland: In 2007, Maryland enacted comprehensive tax fairness legislation, adding a 5% rate on single filers earning more than $150,000 and a rate of 5.5% on those making more than $500,000. In 2008, the state added a top tax bracket of 6.5% for those making $1 million or more -- raising an additional $328.5 million over the next three years.  These laws were approved after a 2003 study by the Institute on Taxation and Economic Policy showed median income Marylanders were paying 8.8% of their income in state and local taxes, while the wealthiest state residents were only paying 5.1%. 
  • Minnesota: Similarly, the Minnesota legislature approved a plan in 2007 (unfortunately vetoed by their governor) that would have cut taxes for 90% of the populace while raising revenue with a new 9% tax rate for married couples making $400,000 per year or more.  Both of these examples show that a fairer tax system can help middle class families without gutting social spending.

This rapid spread of campaigns to raise income tax rates on high-income earners reflects both the present economic crisis and the increasing recognition that it is both the best economic and political option for state leaders.

Resources
Citizens for Tax Justice - Tax Justice Digest
Progressive States Network - Make Tax Systems More Progressive
Working Families Party - Victory for Progressive Taxes!

 

Why Tax Increases are Better than Budget Cuts for Addressing the Economic Crisis

Raising taxes on the wealthy and directing those funds to job growth in our states is the most effective tool policy leaders have to address the current economic crisis.  Despite the argument put forth by some politicians that tax cuts for the rich will "trickle down" to everyone else, the reality is that they don't.  In fact, the best way to help low- and moderate-income families is to do so directly through state spending programs that fund jobs and provide services.  This is not just because it improves the lives of those families, but because it drives broader economic growth as well.

Bottom-Up Economics:  As Nobel Prize winning economist Joseph Stiglitz and Peter Orszag, Obama's new director of the Office of Management and Budget, wrote earlier this decade:

“[E]conomic analysis suggests that tax increases would not in general be more harmful to the economy than spending reductions”¦any tax increase or transfer payment reduction would reduce saving rather than consumption”¦whereas [cutting] government spending on goods and services would directly reduce consumption.

The spending by individuals and businesses that would be affected by tax increases often is less concentrated among local producers — since part of the decline in purchases that would occur if taxes were raised would be a decline in the purchase of goods produced out of state.”

To put it more bluntly, income by wealthy state residents is more likely to be spent on buying a second home in Mexico or France, while money spent on health care, transportation or education will fund jobs and services in your state.  Money spent on a pre-school, for example, not only creates jobs for pre-K teachers, it puts money in the pockets of parents who don't have to pay for private day care and gives them more flexibility in finding and keep work that is available.  Money spent on Medicaid employs local nurses and helps patients financially by allowing them to spend what they do have on other local goods and services. 

State Spending for Low-income Families is the Best Economic Recovery Strategy:  As the Congressional Budget Office has explained, "policies aimed at lower-income households tend to have greater stimulative effects" because such families have a higher tendency to spend money they receive.   Because of this, the Center on Budget Policy and Policy Priorities argued earlier this year that state spending that helps low- and moderate-income individuals such as health care spending or nutrition assistance is one of the best ways to boost the economy.  Many analysts have noted that typical state government spending is particularly well-targeted at boosting economic recovery, so raising taxes on the wealthy who can afford to contribute to fund government spending is one of the most effective approaches to job creation and economic stimulus.

Resources
Peter Orszag and Joseph Stiglitz - Budget Cuts vs. Tax Increases at the State Level: Is One More Counter-Productive than the Other During a Recession?
Center on Budget Policy Priorities - Assistance for Hard-Pressed Families is one of the Best Ways to Preserve and Create Jobs
Progressive States Network - Why States Need to be a Focus for Any Economic Recovery Plan

Economic Growth and Income Tax Rates

Since public investments are dependent on robust state revenues, increasing taxes on the wealthy is a key to both short-run economic recovery and long-term economic growth.  Rightwing attacks on income tax increases as undermining economic growth are just rhetoric unsupported by facts.

Earlier this year, Economist Joseph Stiglitz wrote state leaders in New York in support of proposed tax increases on wealthier New Yorkers, highlighting the short-term economic gains from shifting that money towards state spending for low- and moderate-income families.  But he also emphasized that such spending was crucial to long-term economic growth as well:

"Raising taxes and maintaining public expenditures (including investments) also helps America in meeting its long run needs.  America today faces two major problems -- inadequate investments, especially in infrastructure, and growing inequalty...Investments in infrastructure also increase the productivity of private investment -- another important spillover."

More broadly, in 2004 economist Robert Lynch with the Economic Policy Institute published Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, one of the most extensive analyses of the relation of state tax policies to economic growth.  The bottom-line conclusion of his study was that tax policies themselves have little effect on overall economic growth; what mattered was that states raise enough revenue to invest in the "public services such as education and infrastructure [that] spur economic growth and influence business location decisions."

Higher Tax States Have Higher Incomes and Stronger Income Growth:   Because higher-tax states invest more in their communities, they generally generate higher-wage jobs compared to lower-tax states.  For example, states that enacted large tax increases between 2002 and 2004 — increasing state revenues by at least 5% — subsequently experienced stronger average growth in personal income than states that did not increase taxes at all.  This builds on other analyses that states which collect the highest percentage of personal income in taxes actually sustain higher income growth.

The Wealthy Don't Leave High-Income Tax States:  And despite rightwingers inevitably predicting economic doom, tax increases on the wealthy do not lead to wealthier residents leaving the state:

  • From 2004 to 2006, following California’s implementation of a new national top rate of 10.3% on income over $1,000,000, there was a 38% increase in the number of millionaires in the State.
  • The number of half-millionaires in New Jersey grew by 70% since the state increased their highest rate from 6.37% to 8.97% in 2002, from 26,000 in 2002 to 44,000 in 2006.
  • New York experienced a comparable increase in high-income tax returns after temporarily raising income tax rates earlier in the decade, from 250,000 in 2003 to over 325,000 in 2005, representing a 30% growth.

In fact, the already-wealthy benefit far more from a strong economy, so investments in education, transit and the health of the workforce are worth far more to them over the long-term than a few points added to present day tax rates.

Business Leaders Don't Make Location Decisions Based on Tax Code:  Business leaders don't create jobs in states based on the level of taxation, despite myths to the contrary-- a point even conservative business leaders admit. As Paul O'Neil, CEO of Alcoa Aluminum and Treasury Secretary under George W. Bush admitted in his confirmation hearings :

"I never made an investment decision based on the tax code...If you are giving money away I will take it.  If you want to give me inducements for something I am going to do anyway, I will take it.  But good business people do not do things because of inducements.”

Or as long-time business leader and current NYC mayor Michael Bloomberg said:

"Any company that makes a decision as to where they are going to be based on the tax rate is a company that won’t be around very long.  If you’re down to that incremental margin you don't have a business."

Debunking rightwing anti-tax arguments:  So given these realities, a few key debunking talking points are useful to remember when the rightwing tries to argue that higher taxes will undermine growth:

  • Supposedly "high tax states" usually have higher per capita income growth rates.
  • "Growth" in supposedly low tax states can just mean more low-paying jobs without any wage increases for existing residents.
  • “Low tax” states often have very high user fees and less and more costly services for state residents.

Resources
Joseph E. Stiglitz - Letter to New York Governor David A. Paterson, New York Senate Majority Leader Joseph L. Bruno, and New York State Assembly Speaker Sheldon Silver
Economic Policy Institute - Rethinking Growth Strategies
Center for Working Families - Fact Check: What Happens When Income Taxes on the Rich Are Raised?
Center for Working Families and Fiscal Policy Institute - Back on Track: Why Progressive Tax Reform is an Essential Part of New York's Budget Solution
California Budget Project - Budget Cuts or Tax Increases: Which are Preferable During an Economic Downturn?
California Budget Project - The Number of High-Income Taxpayers Increased During a Period With 10 Percent and 11 Percent Tax Rates on High-Income Earners
Princeton University Policy Research Institute for the Region - Trends in New Jersey Migration: Housing Employment and Taxation
Institute on Taxation and Economic Policy - High Income Tax States Have Strong Economies


Beating Anti-Tax Politics with Tax Fairness

The politics of enacting income tax increases on high-income residents is as clear as the economic argument.  After New Jersey enacted its 2004 plan increasing taxes on the wealthy, the Democratic House majority in 2005 increased to its largest size in three decades, while progressives in Maryland and Minnesota have continued to maintain and even grow strong legislative majorities in the wake of approving bills to increase taxes on high-income earners. 

This has led to a broad trend in recent years of almost consistent rightwing failure on tax issues as progressives have sharpened their message and mobilized.  When the rightwing tried to enact TABOR-like initiatives in states across the country, progressives highlighted fraud in signature collecting in multiple states and issue was thrown off the ballot in Michigan, Montana, Nevada, Oklahoma and Missouri. On Election Day, voters in Maine, Nebraska and Oregon finished the job in voting down the remaining TABOR initiatives.  And in 2008, anti-government tax measures were defeated overwhelmingly in Massachusetts, North Dakota and Oregon.

When progressives stand up for tax fairness and shift the tax burden to those who can afford to pay, the rightwing bogeyman of anti-tax politics is largely toothless.   

Trumping the Rightwing with Tax Fairness:  Almost every state tax system requires working families to pay a higher percentage of their income in taxes than their wealthier citizens. In fact, as the Institute on Taxation & Economic Policy detailed in their 2003 study, Who Pays?

[O]nly four states require their best-off citizens to pay as much of their incomes in taxes as middle-income families have to pay. Only eight states tax their wealthiest residents at effective tax rates as high as the poorest taxpayers are required to pay... Most states tax the wealthy at rates that are much lower than the rates on middle- and low-income families.

chart

Increasing the income tax load paid by higher-income earners addresses the reality that most state voters recognize: the wealthy are not paying their fair share of taxes.  A report by the Center on Budget and Policy Priorities and EPI emphasizes that making state tax systems more progressive is also a way to mitigate the broader trend of growing before-tax economic inequality. 

Addressing that deep sense of political and economic unfairness is the first step necessary to any broader commitment by the public to fund the long-term investments we need for economic recovery and growth. 

Resources
Progressive States Network - Stop Rightwing Tax Campaigns
Ballot Initiative Strategy Center - Investment/Taxes Issues
ITEP - Who Pays? A Distributional Analysis of the Tax Systems in All 50 States
Center on Budget and Policy Priorities and EPI - Pulling Apart: A State-by-State Analysis of Income Trends