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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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