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How Cuts to State Taxes Could Hit Voters in the Wallet

Wallet poorNobody likes to give money to the government, and with bank accounts across the country still smarting from tax season, it seems like a great time to take aim at the tax structure. At least, that appears to be the case in several states that are currently weighing plans to phase out state income tax.

Proponents claim that these proposals will help ease the tax burden on working families but won't translate into significant cuts in services. However, the aftermath of similar policies in other states suggests that the current push to slash taxes may carry a very high price for some of the country's poorest citizens.

Cutting One Revenue Stream ... And Opening Another

In Oklahoma, one state that is currently considering ways to cut its tax burden, the legislature has already passed four separate proposals that call for a total phaseout of the state income tax system. But while the state's politicians agree that taxes need to be abolished, they've had a much harder time deciding on ways to replace the revenue stream. The most popular route is cutting out loopholes in the state tax code, but heavy lobbying from special-interest groups -- particularly senior citizens, retirees and veterans -- have made it clear that closing many of the biggest tax breaks is a non-starter. Not surprisingly, these three groups are also among the strongest voting blocs.

Oklahoma's legislators are gambling that cuts in the state income tax will lead to massive increases in economic growth, as companies would presumably choose to relocate to the state in order to take advantage of tax breaks. With that in mind, a few of the proposals outline plans to phase-in tax cuts slowly, contingent on their success in building up business. For example, House Bill 1571 calls for a 0.25% drop in the tax rate for every 5% of growth in state revenue.

Cutting Taxes ... But Not Services

Tax-slashing proponents have justified their plans with a populist appeal: Most claim that the state's "core services" won't be cut, and that the proposals will give extra money to working families. But even some advocates admit that the tax plans will come with a cost. Sen. Clark Jolley, the author of one plan, notes that his bill is not "revenue neutral": "Let's be very clear. Oklahoma will have less money to operate if this goes into effect." The Republican lawmaker's opponents, in turn, have argued that the lowered revenue stream will translate into cuts in health, education and transportation spending -- programs that directly benefit many of the state's poorer citizens.

But even if services aren't cut, there's a good chance that slashing the state income tax will push a larger share of Oklahoma's revenue burden onto the backs of its poorest workers. In a recent study, the Corporation for Enterprise Development compared the percentage of income that the poorest 20% and richest 1% pay in state income taxes. The nine states that don't impose income taxes -- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming -- topped the list when it came to soaking the poor.

The reason for this is pretty simple: When states cut income tax, they generally make up the difference with hikes in their property and sales taxes. As poorer families tend to spend a larger percentage of their income on necessities, increased sales taxes effectively translate into a straight tax increase for them. By comparison, richer families that are able to save part of their monthly income get a break.

With national Republicans blazing a trail for cutting social services and raising taxes on the poor, it's hardly surprising that many state politicians are following the same playbook. However, as unemployment remains high and average wages stay low, it's increasingly clear that these budget cuts may come with a dangerous price tag.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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There are many peple on SSI in this country and I bet almost all of us know of people who are on SSI that probably should not be. There are also many who are on food stamps and taking other gov. services who are able to work, and could get a job to take care of their families. Working Americans wish to help those who are trully in need, but are getting tired of paying those who are gaming the stystem, so to speak. Also, to say the Republicans are wishing to raise taxes on the poor is un-fair, but considering the source of the article, there is no surprise here. With so many poor on government assistance in this country, the very poor is not paying in taxes, and since many get food stamps and etc. getting rid of state tax to create more jobs is not against the poor. Attracting more companies into the state to create jobs is something states like Tennessee understands is important. It is better to give a person a job than a handout. Handouts will never bring the poor out of povery, only opportunity to work can. I think ever citizen who lives in this country should pay some in taxes regardless of how much money they make.

August 01 2012 at 2:39 PM Report abuse rate up rate down Reply
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Wayne Bradshaw

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Wayne Bradshaw

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May 05 2012 at 11:48 PM Report abuse rate up rate down Reply
Robert & Lisa

It's funny how these far left writers ignore the fact that cutting taxes almost always stimulates the economy. If you want less of something, tax it at higher and higher rates. If you want more of something like jobs, then tax the job creators less. Simple yet so hard for some "elite" people to understand, or maybe they understand but have an agenda...

May 02 2012 at 6:26 AM Report abuse rate up rate down Reply

Margaret Thatcher once said "the trouble with socialism is that you eventually run out of other peoples money".
I'd say we already reached that pont. America is the next Greece.

May 01 2012 at 1:03 AM Report abuse +2 rate up rate down Reply
Andy Alford

I'm a retiree, and a senior citizen, AND I still work for a living. Taxes on Income need to be abolished. Government at all levels need to live within their means. Nothing for free, no free handouts.

April 30 2012 at 10:01 PM Report abuse +2 rate up rate down Reply

Tax relief has not created American Jobs ! Big Business took the Tax Relief and Sent The Jobs Overseas! Congress Has Hundreds of Billions of Our Dollars For Countries & People, Who WANT US DEAD However They Have No Problem Saying NO To American Citizens ! If You Do Not Have The Money To Pay Them Off, Then You Are S.O.L.! For Two Years American Senior Citizens Were Told That The Cost Of Living Had NOT GONE UP, While Congress Gave Itself Cost Of Living Increases For The Same Two Years!! Alan Simpson Has Called American Senior Citizens Greedy - As A United States Sen. He Should Know First Hand About Greedy! These People Have Engaged In Insider Trading & Have Themselves Every Perk, They Could Get Their Hands On! Have Any Of Them Given Their Ill Gotten Gains Back To The American People?

April 30 2012 at 7:49 PM Report abuse +1 rate up rate down Reply

These states are acting like a bunch of teenagers with credit cards. It's fine to cut taxes but a responsible legislature would offset the resulting decrease in revenue with an equal decrease in spending or replacing the lost revenue with another REAL revenue source (not revenue collection based on tax cut enhanced economic growth). In this case,however, these states are trying to push these tax cuts forward even though they have no idea how they're going to make up or adjust for the lost revenue. Once again, it's borrow, borrow, borrow to use tax cuts as another form of stimulus spending.

April 30 2012 at 7:43 PM Report abuse +2 rate up rate down Reply
Steve Washington

Several Republican controlled states give business and corporation big tax breaks. Now they are feeling the squeeze. They are billions more into debt. The tax relief did not create jobs or more revenue. Republicans always think lower taxes create revenue.

April 30 2012 at 6:13 PM Report abuse -1 rate up rate down Reply
1 reply to Steve Washington's comment
Dr. Steve

I live in a democratic state(MD) and they keep raising all the taxes (One of the highest taxed states in the country). No private sector jobs, just government jobs. Both party's have Wall Street in their back pocket - just accept it!

April 30 2012 at 6:39 PM Report abuse +3 rate up rate down Reply