I recently suggested the state should abolish its income tax. So what should replace the $2.2 billion in income tax revenues that the state receives each year? The answer requires a clear understanding of the role of income taxes in our economy.
The central issue in taxation is to do the least harm while bringing in enough money to fund core government programs. Income taxes are essentially a tax on what people produce in either goods or services. Businesses and individuals are discouraged from producing more and hiring more employees to avoid paying more income taxes.
As a result, income taxes are far more damaging to the economy than a consumption tax, which generally is paid by the buyers instead of the sellers.
The Arizona Department of Revenue publishes an annual Tax Expenditure Report that shows potential revenues from applying a 5 percent sales tax to certain currently untaxed expenditures. Many items listed in the report should never be taxed as part of a consumption tax because those items represent an intermediate step, such as buying the necessary parts to build a solar energy plant. But there’s $3 billion in potential tax revenue if the state’s sales tax were applied to all final goods and services.
Details that could be worked out include carefully defining what is a final good or service, and taxing some goods and services at a lower rate than others. But dropping state income taxes in exchange for a broader sales tax base would encourage businesses and entrepreneurs to work harder and take more risks to succeed.
In the long run, everyone would benefit because a healthier economy means the overall tax burden would remain stable and low.
Dr. Byron Schlomach is director of the Goldwater Institute’s Center for Economic Prosperity.
Goldwater Institute: Repealing the income tax would attract new jobs
Goldwater Institute: The Economic Impact of Eliminating the Income Tax in Arizona
Fox Business News: States without Income Tax Grow Faster?
Arizona Department of Revenue: The Revenue Impact of Arizona’s Tax Expenditures FY 2009/10