Tax Analysts Blog

Some things worth pursuing in 2016

Posted on Dec 16, 2015

As 2016 fast approaches, I have some suggestions for those responsible for state tax policies. These suggestions will make the tax system -- and indeed, the government -- fairer, more transparent, and more efficient. And they should be issues that both Democrats and Republicans agree on. Here they are:

1. Adjust the system for inflation. Only half the states fully index their income tax brackets to inflation. That hurts everyone, particularly low-income residents. Moreover, many states do not index their standard deduction or personal exemptions to inflation. Without indexing, citizens pay higher taxes, often without real income increases and without any legislative action. If your state has an income tax, make sure it is indexed to inflation.

    2. Expand the earned income tax credit. The EITC isn't perfect, but it is one of the most effective and efficient means of providing relief to the working poor. Don't forget that it was a conservative idea. The EITC helps mitigate the decidedly regressive nature of the state tax systems. States that have an EITC should expand it, and states that don't should adopt one.

    3. Install an independent tax tribunal. It amazes me that only half the states have a system of adjudicating tax disputes that isn't run by the revenue department. There is nothing fair about an administrative law judge who is deciding your case also working for the same guy who's prosecuting your case. If your state doesn't have an independent tax court, fight for one. And while you're at it, fight for a system that doesn't require payment of alleged liabilities before challenging a deficiency.

    4. Oppose tax incentives. I know -- incentives are seemingly invulnerable in our political system. But the difficulty of the task should not deter the righteous. Tax incentives violate every principle of sound tax policy. They are unnecessary. They are unfair. Liberals should hate them because they waste money that could be used for schools and healthcare. Conservatives should hate them because they are the antithesis of a free market.

    5. Fight for greater transparency. As an employee of Tax Analysts, I would be remiss not to encourage greater openness on the part of state governments in tax practice and policy. We should encourage as much guidance as possible. We should ensure that all judicial opinions are released to the public. We should strive to make all administrative determinations available to the public. An ounce of secrecy when it comes to taxes is too much.

    Read Comments (2)

    mike55Dec 17, 2015

    Great list overall, though I'm not so sure the EITC belongs. I'm a huge fan of
    the EITC concept at the federal level and would very much like to see it
    expanded (assuming someone can figure out how to get the error rate to an
    acceptable level, and the underlying goal isn't lost in the expansion process).
    I also thinks it makes a ton of sense for high income states. The trouble is,
    the EITC makes very little sense for moderate/low income states.
    It's no accident the lower income states don't have their own EITCs. While
    there are certainly plenty of "working poor" in those states, the relative cost
    of helping them via a state level EITC is much higher than at the federal level
    or in a high income state. The reason is that (1) the relative benefit of an
    EITC decreases as the cost of living decreases, and (2) the relative cost of
    the EITC increases if there' not a sizeable high-income population to transfer
    the funds to the working poor. In a place like Mississippi, there's probably a
    much better way to spend state funds than on an EITC.

    edmund dantesDec 17, 2015

    There are two problems with the EITC. First, there is a tremendous amount of
    improper claims, much of which may be outright fraud. I saw the numbers years
    ago, and they are "yuge." The improper claims rival many tax expenditures.
    Second, the working poor face shockingly high marginal tax rates as the EITC
    phases out. So while it is a good incentive for working, it becomes a very poor
    incentive for working harder.

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