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A ‘Flip’ Solution to Ending Budget Shortfalls

Research & Commentary
May 25, 2011


A new United for a Fair Economy report, by standing our current state tax system on its head, is dramatizing the illogic of public service cutbacks.

In this spring of massive layoffs and wage cutbacks, nobody can really blame local classroom teachers, firefighters, and police for wanting to turn back the clock a few decades or so, back to a time when America seemed to really value public services — and the people who provide them.

Unfortunately, we can’t go back in time. So we need, suggests an imaginative new report from the Boston-based United for a Fair Economy, to do the next best thing. We need to turn our state fiscal status quo upside-down. Literally.

If every state “inverted” its tax structure — that is, had the state’s most affluent pay the same share of their incomes in state and local taxes as the state’s least affluent, and vice versa — the current lake of budget red ink that covers the nation’s state capitals, the new UFE report documents, would totally disappear.

In a “progressive” tax system, affluent people pay a greater share of their income in taxes than the less affluent. By this yardstick, notes UFE’s new Flip It to Fix It: An Immediate, Fair Solution to State Budget Shortfalls, no state tax system in the United States can currently lay claim to true “progressive” status.

In state after state, this new Flip It to Fix It report explains, low-income taxpayers bear a heavier tax burden than high-income taxpayers.

How much heavier? To dramatize the amazing depth of our state and local tax “regressivity,” United for a Fair Economy has calculated how much revenue states and local governments would raise if they flipped their current effective tax rates at the 50th income percentile — and had each state’s highest-income 20 percent pay taxes at the same rate the state’s poorest 20 percent pay today.

In this UFE exercise, the poorest 20 percent then pay their taxes at the current top 20 percent rate, and the next highest and lowest “quintiles” also trade places.

The result of this fiscal flip? States and localities, simply by turning effective tax rates upside-down, would raise an additional $490 billion, far more than enough revenue to wipe away this fiscal year’s $112 billion combined state and local government budget shortfall, with plenty of cash to spare, observes UFE, for “economy-enhancing” investments in infrastructure and the like.

Actually making this flip would, of course, require changing current state tax systems — raising far less income from regressive sales taxes, for instance, and far more from income taxes “graduated” to levy higher tax rates on higher incomes. States should also consider, advises UFE, inaugurating new graduated taxes on capital gains and estates left behind by wealthy taxpayers.

United for a Fair Economy researchers are hoping their new Flip It to Fix It paper helps expose “the economically unsound and unfair regressive nature of existing state and local tax structures — and the extent to which simple, commonsense equity can produce significant benefits.”

Or, in other words, instead of cutting and gutting, let’s just flip.

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