Governors Push Bigger Reliance on Sales Taxes

David Paul Morris | Bloomberg | Getty Images

WASHINGTON — Republican governors are moving aggressively to cut personal and corporate income taxes, including proposals that would increase reliance on state sales taxes, setting up ambitious experiments in tax reform that could shape what is possible on a national level.

Even as Washington continues to discuss, if not act, on ideas for making the federal tax system simpler and more efficient, governors, some with an eye on the next presidential race, are taking advantage of the improving economy and a gradual rebound in revenues to act.

In Louisiana, Gov. Bobby Jindal is pushing to repeal the state's personal and corporate income taxes and make up the lost revenue through higher sales taxes. Gov. Dave Heineman of Nebraska is calling for much the same thing in his state. Gov. Sam Brownback of Kansas wants to keep in place what was supposed to be a temporary increase in the state sales tax to help pay for his plan to lower and eventually end his state's income tax. (Read More: Gov. Sam Brownback: Make Kansas Income Tax Free)

Along the way these governors are taking small first steps into a debate over what kind of tax system most encourages growth in a 21st-century economy. In particular they are focusing attention on the idea, long championed by conservatives but accepted up to a point by economists of all stripes, that the economy would be better served by focusing taxation on consumption rather than on income.

Taxing consumption has the potential to lift economic growth by encouraging more savings and investment. But the shift could also increase inequality by reducing taxes predominantly for the wealthy, who spend a smaller share of their income than middle- and lower-income people.

"The question of whether we should tax income or whether we should tax spending is really a proxy for a different debate," said Joseph Henchman, vice president for state projects at the Tax Foundation, a conservative-leaning research organization. "Everyone agrees we'll get more growth with consumption taxes. It's just that some people prioritize fairness."

Beyond citing economic growth, the governors and their supporters say their plans would help make their states more competitive in attracting employers and high-skilled workers, simplify their tax systems and curb pressure for more government spending.

For Mr. Jindal and other Republican governors who are considering a presidential run in 2016, there are obvious political benefits to having a robust income tax-cutting record to present to conservative primary voters.

But Democrats say the approach would lead to cutbacks in education, health care and other vital services while shifting relatively more of the tax burden to those who can least afford it.

"These aren't pro-growth policies — they're shell games that reward the wealthiest Americans at the expense of everyone else," said Danny Kanner, a spokesman for the Democratic Governors Association.

Nationwide, sales taxes account for about 46 percent of state revenues, and personal and corporate income taxes for about 42 percent, according to the National Conference of State Legislatures. States with relatively low income tax rates like Louisiana, which raises about $3 billion a year from its personal and corporate income tax system, can more easily shift toward a sales tax-only system than states with much higher rates, like New York or California.

Louisiana already has the nation's third-highest sales tax, after Tennessee and Arizona. Combined state and local sales taxes average 8.84 percent, according to the Tax Foundation.

It is not clear whether any of the proposals will make it into law; even in states with Republican-dominated legislatures, governors face difficulty as they pursue their proposals because changing the tax code almost invariably creates losers as well as winners. In Kansas, Mr. Brownback wants to pay for lower income tax rates in part by making permanent what had originally been a temporary sales tax increase, but also by eliminating deductions for property taxes and mortgage interest, setting off objections even in his own party.

And just as President Obama has raised income tax rates on upper-income families, Democratic governors including Martin O'Malley of Maryland, Jerry Brown of California and Deval Patrick of Massachusetts have supported or put in place income tax increases on the wealthy.

"I don't believe greater reliance on the sales tax is likely to be a broad trend in the country, although we may see it in some places," said Donald J. Boyd, a senior fellow at the Rockefeller Institute of Government. "In recent years voters and politicians have generally shown in a variety of ways that they have been more willing to support tax increases on higher-income taxpayers than on the broad populace."

The shift toward sales taxes in some states is incremental, and nowhere near the scale or complexity that would characterize adoption of a federal consumption tax.

Still, the results could resonate in other states and in Washington. Nearly all other wealthy countries have some version of a national consumption tax.

The debates going on in the states, said R. Glenn Hubbard, dean of the business school at Columbia University and a former top adviser to President George W. Bush, "offer suggestions for federal tax reform, too." He cited proposals for marrying a broad-based national consumption tax with a wage tax on high earners to address concerns about fairness.

Mr. Jindal, whose status as a likely candidate for the White House in 2016 has drawn particular attention to his proposal, has signaled that he wants his plan to be revenue neutral, meaning that every dollar of revenue lost from eliminating the personal and corporate income tax would have to be made up elsewhere. The only viable source for making up most of the money is raising the state's sales tax.

He has not yet settled on any specifics for changing the sales tax, and his aides say he would include safeguards to assure that lower-income people were not made worse off.

By focusing on sales tax revenue, Mr. Jindal has also opened up a fundamental issue in an Internet-heavy economy. Sales taxes were developed in an era when sales of physical goods dominated the economy, and they exempt many services, which now account for a majority of spending.

Hair spray is taxed, but not haircuts. So if states — or one day the federal government — want to shift toward a truly broad-based consumption tax, they would have to expand the definition of what should be taxable.

Officials in Louisiana have indicated that Mr. Jindal is at least open to looking at a broader sales tax that included some services.

"If the sales tax is going to stay a viable source of revenues for state governments, you have to bring in services," Mr. Henchman said. "It's not just haircuts and tattoo parlors. It's lawyers and accountants and real estate agents."