In principle, the state could effectively end the federal income tax by using two surprisingly simple and straightforward legislative maneuvers—neither of which involves secession. Texas could choose to send its federal taxpayers a check in the form of a state tax credit equal to their federal income tax liability. It could then pay for the credit by increasing the state sales tax in a revenue-neutral way. effectively, that would mean the end of all income taxes in the state while significantly raising sales taxes. This isn’t about cutting taxes per se; rather, this is the tax swap to end all tax swaps.
This is an interesting and original proposal, but surely he has not thought through all of the consequences. For example, if this were enacted, then residents would have no incentive to minimize their tax liability. Go ahead and realize all of your capital gains, because when you pay more Federal taxes, your state sends you a credit. So it seems to me that one consequence would be a huge windfall increase in Federal revenue, financed by higher state sales taxes.
Does the value of the tax breaks outweigh the cost of the distortions in all states?
With such a narrow tax base, the rates would have to be prodigious and with such high sales taxes, buying across border becomes a no-brainer, with near total avoidance by any nonresident, they would be lucky if they could collect half, requiring rates exceeding 50%.
I think this is right. Let’s say State A has a 30% sales tax and 0% income tax, and State B has a 0% sales tax and a 30% income tax. The obvious thing to do is to live in State A and do all your shopping in State B.
Though it might be worthwhile studying where the largest existing discontinuities in sales/income tax across state borders exist, and if any of those places exhibit such behavior.
The most well-known place with that setup in the US is the Oregon-Washington border. Washington has no income tax and Oregon no sales tax. A decent number of people do live in Washington and shop in Oregon.
Who would be the people that would open stores and earn income in State B so that people from State A could shop there? Wouldn’t (pre-tax) prices in B be higher than in A, offsetting some of the tax differentials?
That doesn’t nullify the liability, it just spreads it out. The feds still get their money; it just comes from the sales tax instead of the income tax.
In other words, if Texas doesn’t like that the rich guy pays $100K and the poor guy pays $20K, it can change that $120K obligation to make it more or less equal, as it desires. But it can’t change the total of $120K that has to go to the IRS.
I think the point is to convert the income tax, which penalizes savings and investment, into something closer to a consumption tax, which is more efficient. The point is that Texas (or any other state) could do so unilaterally, without needing to get through Congress.
Given the largest deduction is from the Federal Mortgage deduction, it’s probably net-utility increasing if this discourages people from buying excess housing.
Interesting proposal, I wonder where it’d be best to test it.
Of course, if a group of states seceded to get out from the yoke of leviathan, what would the other states do? Send a bunch of conscripts to enforce the income tax withholding?
Amusing to contemplate.
Amusing, sure, until you think about how they did more over less last time.
This is the problem with Virginia “Car Tax Relief,” which was a tax set by and going to counties (and independent cities) that the state decided to refund. The state caps how much money is sent back to each county.