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Group Says Enacting State Income Tax Would Reduce TN Sales Tax

Statement by John G. Stewart, Chair, Tennesseans for Fair Taxation, on the Tax Foundation’s Report on State Tax Rates, Aug. 23, 2010:

The Tax Foundation is correct in pointing out that Tennessee has the highest combined state and average local sales tax rate in the country. This means that lower income families pay a far higher percentage of their income to the state than do higher income families—about 12% for lower income families compared to about 3% for higher income families. This is grossly unfair and destructive to most Tennessee families.

What can we do about it? Tennesseans for Fair Taxation has for many years advocated cutting our sales tax in half and eliminating the food tax entirely. We also propose enacting an income tax with generous exemptions, such that a family of four earning $45,000 would be totally exempt. This approach evens out the tax burden for all Tennesseans, plus it gives about 70% of Tennesseans a tax cut from what they are currently paying to the state.

Our approach would also generate about $1 billion of additional revenue so that crippling budget cuts in education, economic development, public safety, child support, and environment can be avoided.

If ever there was a win—win—win proposal, this is it.

“Washington, DC, August 19, 2010 – Tennessee has the highest combined state and average local sales tax rate of 9.44%, and the Alabama cities of Birmingham and Montgomery are tied for the highest combined state, county and city sales tax rates among major metropolitan areas at 10%, according to two new Tax Foundation reports on state and local sales taxes.”

8 replies on “Group Says Enacting State Income Tax Would Reduce TN Sales Tax”

Auditing the FairTax
Practically, there are a number of problems with the FairTax as well.
First, maintaining that the FairTax is a “fair” tax system, or one that is “fairer” than our current system, is highly subjective. As Boortz himself acknowledges in his new book on the FairTax: “Whether a tax system is ‘fair’ is a complicated economic and philosophical question, one that inevitably involves oversimplification and subjective judgment.”
Second, FairTax proponents have made so many grandiose claims for the FairTax that it is hard to take them seriously. The FairTax, they say, will result in unprecedented economic growth, a tremendous increase in capital investment, substantially lower interest rates, the creation of millions of new jobs, the saving of Social Security and Medicare, the doubling of the economy within 15 years, and the greatest transfer of power away from the government ever seen. It is also claimed that the FairTax is voluntary since one could choose not to purchase a new good and therefore not have to pay any tax on it. But aside from the fact that one cannot purchase used food, the FairTax is a voluntary tax only in the sense that the present system is “voluntary”: if one chooses not to earn any income under the current system then one doesn’t have to pay any income tax. One must buy things as a matter of course to live in a modern society.
Third, the FairTax eliminates neither the 16th Amendment nor the federal tax code. Nor does it eliminate what is now called the IRS. To repeal the 16th Amendment would require another amendment. And contrary to the claims of FairTax promoters, calling the IRS by another name while redirecting its mission is hardly eliminating it. Just as the income tax would be replaced by the FairTax, so the IRS would be replaced by the “Sales Tax Bureau” in the Treasury Department. The FairTax bill also wouldn’t replace the federal tax code. It repeals four subtitles, redesignates seven others, and adds a new one that implements the FairTax.
Fourth, adopting the FairTax doesn’t mean that the income tax couldn’t be reimposed. Congress might simply decide to resurrect the income tax because it is not politically expedient to raise the rate of the FairTax. This could be sold to the American people by lowering the FairTax rate, reinstituting the income tax, and then claiming that the combination of the two was revenue neutral. And even if the 16th Amendment were repealed, there is nothing preventing Congress from implementing some form of an income tax.
Fifth, the FairTax prebate will give some people more money “back” than they paid in (national sales) taxes, much like the earned income tax credit does today. Like any refundable tax credit, the prebate is just another income-redistribution scheme.
And sixth, FairTax proponents are very naïve to think that Congress wouldn’t turn the FairTax into a monstrosity just as hideous as the current tax code. The rate of the FairTax could be raised at any time. The exemptions currently on certain services could be removed. The prebate could be subject to a means test, or simply eliminated for upper-income taxpayers and increased for seniors, the poor, minimum-wage earners, and anyone receiving public assistance.
Reducing Taxes
The fundamental problem is clearly taxation itself, not the tax code. The problem with the code is not that it is too complex, too intrusive, too long, too full of loopholes, too unfair, or too progressive. The problem is that it is used to feed the federal leviathan in the amount of almost $3 trillion a year.
Since it is a tax-reform proposal instead of a tax-reduction proposal, the FairTax merely changes the way that taxes are collected. It is an incremental step toward neither lower tax rates nor lower taxes. And it is certainly not a plan to return the size, scope, and cost of the federal government to its proper constitutional authority. With President Bush’s proposed new budget topping $3 trillion and the national debt fast approaching $10 trillion, the need of the hour is clearly to rein in government spending, not change the way the government raises its revenue. FairTax proponents have the proverbial cart before the horse. Their energy is misdirected. As Congressman Ron Paul has remarked on several occasions: “The real issue is total spending by government, not tax reform.”
The income tax should be repealed, not replaced. The IRS should be abolished, not given a new name. Tax reform should result in revenue reduction, not revenue neutrality. Because the FairTax falls far short of these goals, it should not be considered a “fair” tax. It should therefore be rejected by all Americans who favor a return to the limited government of the Founders.
________________________________________
Laurence M. Vance is a freelance writer who has reviewed both of Boortz and Linder’s FairTax books.

Tennesseans for Fair Taxation does NOT support the so-called Fair Tax, a proposal for a form of national sales or “value added” tax.

I am running for State Representative in the 64th district. If elected, I will vote to remove the sales tax on groceries and non-prescription drugs and lower the sales tax on all other items to 4%. I will vote to replace the revenue with a progressive income tax. Thanks for any support you can give me.

Let me rephrase Mr. Stewart here. Since he’s based this piece on information from the Tax Foundation I think it’s only “fair” (ok, I had to make that pun) that we balance Stewart’s message with the Tax Foundation’s ‘Principals of Sound Tax Policy’ (http://www.taxfoundation.org/files/tax%20foundation%20principles%20of%20sound%20tax%20policy.pdf).

I’ll mark my comments inline using [] and note Tax Foundation principles with “TF”.

From Mr. Stewart:
“Tennesseans for Fair Taxation has for many years advocated cutting our sales tax in half and eliminating the food tax entirely. We also propose enacting an income tax with generous exemptions, such that a family of four earning $45,000 would be totally exempt.

[Exemptions complicate the tax process. TF says ‘Simplicity’ is better. Complications undermine voluntary compliance and increase the administrative costs.

Family of four? This policy is very manipulative. It defies the TF principle of ‘Broad Base and Low Rate’. Such targeted deductions increase the tax burden for other types of families.
It can really strain people at the worst of times. Suppose a family of four goes through a divorce. The burden of paying for another house AND a higher payroll tax burden are thrust upon one parent. That parent is also likely to be paying over 21% of their pay in child support!
This works against TF principle ‘Stability’ and would encourage a person to work ‘under the table’ to make up for the loss without paying higher taxes in the process.]

This approach evens out the tax burden for all Tennesseans, plus it gives about 70% of Tennesseans a tax cut from what they are currently paying to the state.

Our approach would also generate about $1 billion of additional revenue so that crippling budget cuts in education, economic development, public safety, child support, and environment can be avoided.

[“additional revenue”? So the plan isn’t just to make things “fair” for the poor, it is going to increase taxes on about 1.4 million Tennesseans.

Child Support, what on earth? The state department of revenue doesn’t pay child support! The state budget can not cut or make gains in Child Support payments. That is arranged through the Income Shares formula overseen by the court system and DA.]

If ever there was a win—win—win proposal, this is it.”

[Win – win? By robbing Peter to pay Paul? Mr. Stewart thinks that Peter wins even though he has done nothing to incur a debt to Paul. What more, now Paul has less incentive to improve his own situation. I call that a Loose – loose.]

Overall it seems that Stewart could spend a little more time reading at the Tax Foundation and not just trying to abscond with their research. He’s totally left out the aspect that our state is a low tax state because we don’t have an income tax. Other states have BOTH and the burden is much higher. In downward economies like we’ve seen for several years those states are having a much harder time BECAUSE they relied more on income taxes which decrease during layoffs at the very time more people are clamoring to the state for aid.

Thanks, but no thanks. A true way to be more fair might be to reduce grocery taxes while increasing the sales tax on everything else. Maybe raising the tax on prepared food and services.

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