For A Model Of Inequality, Look To Democratic Governors
It’s become clear over the last few weeks and months that income inequality is the White House’s and Democratic Party’s new pet obsession heading into the 2014 midterm elections. It’s all the folks on MSNBC talk about these days and President Obama focused on it during Tuesday’s State of the Union address.
However, actions speak louder than words. A look at the policies signed into law in recent years by Democrats who run some of the largest states in the union shows that unequal treatment is the name of the game when it comes to fiscal policy. Prominent Democratic governors, some of whom are 2016 contenders, have passed laws that raise taxes and costs for ordinary individuals, families, and small businesses, only to then exempt the politically-connected.
Take Illinois, the state where President Obama was a member of the state senate in Springfield just ten short years ago. In January 2011, Gov. Pat Quinn (D) signed into law a 66 percent personal income tax increase and raised the state corporate tax by 23 percent. Opponents of Gov. Quinn’s tax hike noted that it would drive companies from the state and prevent new jobs and investment from coming in. It didn’t take long for this prediction to come to fruition.
As the Wall Street Journal reported in December of 2011, Gov. Quinn’s tax increases “fired up a motorcade of lobbyists from major Illinois companies like Motorola, Caterpillar, Sears, and others to descend on Springfield to seek tax breaks lest they leave for states where business taxes are much lower.”
Less than a year after Quinn signed the largest tax increase in Illinois history into law, state lawmakers scrambled to approve $85 million in preferential tax breaks for the Chicago Mercantile Exchange and the Chicago Board of Trade to keep them from leaving the state. Sears, which has been headquartered in Chicago since 1887, received $15 million in tax relief to stay. Though the tax exemptions kept CME and Sears in the Land of Lincoln, ordinary Illinois taxpayers, along with small businesses who can’t afford a team of high-priced lobbyists are left to foot the bill for Quinn’s tax hikes.
While the state’s largest corporations received cherry-picked relief from the 2011 tax increase, the more than 900,000 Illinois small businesses that file under the individual income tax system were socked with a 66 percent increase in their state income tax rate. When one considers that this is the political environment in which President Obama cut his teeth, the White House’s practice of exempting the politically-connected from Obamacare is less surprising.
Then there is New York Gov. Andrew Cuomo (D), a 2016 presidential prospect who, when he is not encouraging people he disagrees with to leave the state, is busy promoting the tax breaks that companies can receive for moving to New York. Unfortunately, employers already located in the Empire State that have toiled under New York’s hostile business tax climate – worst in the nation, according to the non-partisan Tax Foundation – and survived are left holding the bag and stuck footing the full tax bill.
There is great inequality in New York’s tax code when it comes to the treatment of small businesses and large corporations. New York is one of only eight states in the country that taxes small businesses and pass-throughs, which file under the individual income tax system, at a higher rate than large corporations. And Cuomo has only exacerbated the disparity in tax treatment between large multinationals and mom-&-pops. The personal income tax increase signed into law by Gov. Cuomo in 2011 raised the top marginal state income tax rate paid by 8,000 New York small businesses by 27 percent. Factoring in S-corps and partnerships that also pay the individual income tax, more than 10,000 New York small businesses saw their taxes go up and job-creating capacity significantly slashed by Cuomo’s tax hike.
At the federal level, President Obama and Congressional Democrats have been operating under the same tax playbook as Cuomo, allowing the federal income tax rate paid by small businesses to surpass the corporate rate by over four percentage points on January 1st, 2013.
Meanwhile, Republican-controlled states, such as North Carolina, have increased fiscal equality. Last year North Carolina passed a historic tax code overhaul that reduced and flattened their personal income tax. Referred to by Tax Foundation economist Scott Drenkard as one of the top three “most beneficial state tax reforms in the last decade,” North Carolina Republicans passed legislation to move from a tiered income tax system with a top rate of 7.75 to a flat 5.75 percent.
Progressives, Democrats, and other flat tax opponents argue that those who earn more should pay more in taxes. Well, that’s exactly what happens under a flat tax. With North Carolina’s new 5.75 percent flat tax, an individual with taxable income of $40,000 a year would owe the state $2,300, whereas someone with taxable income of $100,000 a year would pay $5,750 in state income tax.
Not only did North Carolina’s tax overhaul institute equality in taxation in the Tar Heel State, it provided tax relief to every income group. The Raleigh-based John Locke Foundation recently released new analysis that shows that the flattening of the personal income tax provided tax relief to all categories of income, not just the wealthy.
The topic of income inequality is not going away. Democrats plan to make it a focus of the 2014 midterms and Republicans should not shy away from it. For when it comes to the tax policies pursued at the state level, where nearly three-quarters of the states are under unified party control, Democrats are increasing fiscal inequality while Republicans are moving in the opposite direction.
Patrick Gleason is director of state affairs at Americans for Tax Reform. You can follow Patrick on Twitter @PatrickmGleason