Taxes

By Brett Rowland | The Center Square

(Worthy News) – As Republican-led states move to lower or eliminate income taxes, President Donald Trump’s economic advisers have suggested moving ahead with broader state sales taxes to boost economic growth and wages for workers.

Meanwhile, Democrat-led states are heading in the opposite direction, considering higher income and wealth taxes.

Washington, which has never had an income tax because the state constitution forbids it, is moving toward adopting a so-called millionaire’s tax. Gov. Bob Ferguson plans to sign legislation imposing a 9.9% tax on individual or household income above $1 million annually. The funds will support state programs, provide tax relief for lower-income families, and bolster the general fund.

In contrast, Georgia lawmakers have introduced bills to phase out the state income tax over six years.

Since 2021, 23 states have reduced their top marginal income tax rates, according to Jared Walczak, a senior fellow at the Tax Foundation.

“We are witnessing two opposite movements: in some states, concerted efforts to raise taxes on high earners, and in many others, a strong focus on cutting rates and prioritizing greater tax competitiveness,” Walczak noted.

Earlier this year, Trump’s Council of Economic Advisers proposed replacing state income taxes with broader sales taxes on both goods and services. The proposed tax would exempt housing, groceries and items already subject to excise taxes, such as gasoline, alcohol, and tobacco.

Unlike most existing state sales taxes, which mainly target goods, the proposed CEA sales tax would also apply to services. Goods account for only about 30% of personal spending, according to a report.

“Most states can replace their personal income tax, corporate income tax, and existing general sales tax with this new sales tax below 10% and still attain full revenue replacement,” according to the CEA report. “Exempting rent and groceries from tax helps ensure that the burden of this new tax system does not fall on low-income citizens.”

The CEA estimates that eliminating income taxes could increase state economic growth by 1% to 1.6% and raise average wages by $4,000. Under full revenue replacement, the average sales tax rate would be just under 8%, or 6.2% if states limit spending growth.

Trump has repeatedly floated the idea of replacing the federal income tax with tariffs – taxes on imported goods – even after the U.S. Supreme Court struck down his unilateral tariffs under the International Emergency Economic Powers Act.

(KLZ Editor’s comment: Trump’s tariffs have increased since the SCOTUS decision, as we talked about with Brian Lantz on Above The Noise recently.  While some outlets naively say that the tariffs are no more, they have simply changed the way in which they are charged to sovereign nations imports.)

“As time goes by, I believe the tariffs paid for by foreign countries will, like in the past, substantially replace the modern-day system of income tax,” Trump said during his State of the Union address, the day after the Supreme Court decision.

The Tax Foundation’s Erica York and Huaqun Li have said the math doesn’t work on Trump’s proposal.

“The individual income tax raises more than 27 times as much revenue as tariffs currently do, but it’s not the gap in revenue levels that makes replacement impossible,” they wrote last year. “To replace the roughly $2 trillion of revenue raised by the individual income tax with tariffs would require astronomically high tariff rates. And raising tariff rates astronomically high would significantly depress imports, making it impossible to generate enough revenue to fully replace the income tax.”

Voters don’t like Trump’s tariffs and say they’re essentially a tax on Americans. Economic research has found that American consumers and businesses are picking up nearly the full tab for Trump’s tariffs.

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