State Income Tax Would Firm Up Flaccid Sales Tax Revenues

Republican blogger John Tsitrian has consistently voiced his support for a state income tax in South Dakota. Tsitrian restates his case now in the context of underperforming state sales tax revenues, arguing that we need a third leg on the taxation stool to stabilize state revenues:

Consider this: swings in commodity prices make farm state revenues subject to the vagaries of global markets. By now we should have reached a point where dependence on sales taxes needs to be reconsidered as a primary revenue source. Throw in the growth of e-commerce and you’ve got a situation like the present one, where the only surprise is the fact that so many people are surprised.

We really need to think about another source of state revenues, which in this case is income.  Even as our sales taxes have turned into a serious floppola this year, median income in South Dakota has been rising.  Though hovering slightly behind the national growth rate during the last 5 years, South Dakota median household income (per BHKN) has nevertheless risen steadily during that period.  Taxes raised from income would have avoided the sudden lurch we’re currently experiencing [link modified; John Tsitrian, “Time for South Dakota to Institute an Income Tax,” The Constant Commoner, 2016.11.26].

Notice that Tsitrian does not punctuate his headline with a dodging question mark. He means it: South Dakota needs and income tax. Of course, Tsitrian is a Republican, and he isn’t running for office, so he doesn’t have to listen to the advice we Democrats get to keep quiet about sensible fiscal policy that’s good for South Dakota’s working class.


38 Responses to State Income Tax Would Firm Up Flaccid Sales Tax Revenues

  1. FACT: Sales tax is a less volatile source of tax revenue than income taxes. In addition to the following, you can find multiple such analysis of the two.

    http://www.pewtrusts.org/en/research-and-analysis/analysis/2015/01/revenue-volatility-varies-widely-by-state-and-tax-type

    If you want to promote an income tax, do it on its merits and not something contrary to facts. Selecting a single year when incomes go up and saying “This justifies an income tax” without putting it in context is dishonest.

  2. People that want a State income tax can move to Minnesota they can start paying today. All that happens is you lose upto 10 percent of your pay check.

    Time for less wasteful government spending. Time for the tax and spend liberal republicans to start doing as they promised cut government.

  3. Sam only the wealthy pay 10% in MN, those making over 129,000/yr.

  4. Why go to Minnesota when Colorado would be a whole lot cheaper and much more fun. https://smartasset.com/taxes/colorado-tax-calculator

    I have some pals there that pay considerably less property tax than I do and have a better go in general for almost everything. The thought has certainly crossed my mind of making the move. Family and all, make it difficult.

  5. And it’s 9.85%, not 10% for the higher income rates in MN.

  6. 4.83 in Colorado

  7. MN is just following one of Catholic social teachings – don’t unfairly hurt the poor, have the rich pay more.

  8. Jerry, that is interesting about Colorado. I read they a flat rate of 4.83% for their state income tax. How long has that been in effect?

  9. Sorry 4.63% flat rate

  10. Use this to see how the property tax works as well https://smartasset.com/taxes/colorado-tax-calculator Then compare it to South Dakota

  11. Sam, one of the most insulting ploys I hear in political discussions is to tell people who advocate policies with which I disagree to move away. I find that line unacceptable. We debate as neighbors who live here and belong here, with the assumption that, win or lose, will will remain and see each other at the grocery store and the street dance. To say “Move to Minnesota” undermines the idea that we have to coexist in democratic pluralism.

    Instead of telling you to move away, I’m going to tell you to knock off the insults, accept that you live among people who don’t affirm your beliefs just as I must, and carry on with the effort to determine workable public policy for all South Dakotans.

  12. Roger Cornelius

    Nobody has a right to demand or even suggest that any American move anywhere they may not choose to live.

    That is and always will be the cheapest of suggestions.

  13. Troy, FACT: you didn’t click my penultimate link, did you? On September 22, 2015, I blogged an Urban Institute report that said sales tax doesn’t provide states with as much reliable long-term revenue growth as income tax. The authors acknowledge the volatility you speak of, but say we can ride out that volatility with smart governing:

    Overall, however, the income tax is a more powerful tax than the sales tax and faces less erosion over time. The sales tax has become less efficient because of consumer patterns shifting more toward services, eroding the tax base. Replacing income taxes with sales taxes would risk even more anemic revenue growth. A better solution to the volatility of the income tax might be to increase rainy-day funds or smooth spending growth during boom periods. California, for example, has dedicated any additional tax revenue from capital gains above 8.5 percent growth to a stabilization fund, mitigating the volatility on general revenue sources but not sacrificing the revenue [Norton Francis and Frank Sammartino, ““>Governing with Tight Budgets: Long-Term Trends in State Budgets,” Urban Institute, September 2015].

    Balance sales tax with income tax, don’t go hog-wild in boom years, ride out the lean years on wisely built-up reserves, and over the long-term, you’ll have a more reliable stream of revenue to sustain state functions. Plus, you’ll have collected that revenue less regressively.

    Is that long-term contextual and honest enough for you?

  14. Porter Lansing

    Jenny … CO has had a state income tax for at least the 40 years I’ve lived here. And, it’s deductible from your federal income tax. It’s always a nice refund check, every spring.

  15. John Tsitrian

    Sorry Sam@, I’m staying put. You’re stuck with me. If you can’t get used to it, you might think of moving away. Troy, you know me better than that. I didn’t “dishonestly” select a “single year when incomes go up.” Median household incomes in SD have been rising steadily for many years. You can check that out here: http://www.southdakotadashboard.org/south-dakota-dashboard/dashboard-newsfeed I appreciate the backward-looking Pew chart that stops at 2013, but I think a forward-looking analysis would factor in the growing problem of lost sales taxes to e-commerce, which now accounts for 8% of retail sales in this country and continues to be in an uptrend. And ag commodity price volatility has increased significantly in recent years, thanks to derivatives (remember ’08?), meaning the kinds of revenue lurches that our ag sector has seen in recent years is likely to continue to be a headache for SD’s economy. You want to look backward, go right ahead. I think wise heads in this state should be able to figure out that a problem with no precedent is looming.

  16. Porter Lansing

    @Jerry … When you move to CO stay away from Colorado Springs. That’s where the Repubs live and it’s underfunded, dirty and depressing. You’ll love our climate, especially tucked up against the foothills. No wind, no humidity and no bugs. lol Rarely above a hundred and rarely below zero. We pay a little more in taxes but we have a lot more nice things than SoDak. That’s what a state income tax does. It pays for the nice things we all enjoy (state parks with clean rest rooms, mountain recreation areas, concert venues etc.) You’re certainly welcome to join the thousands moving here, every month.

  17. CH,

    Income taxes not indexed to inflation do just as you say (tax payers are pushed into higher tax brackets so there is a constant hidden tax increase without politicians having to vote for it). Index to inflation and the “growth” isn’t there.

    John, like Corey, you are adding different arguments vs. the initial argument with regard to a more stable source of revenue.

    Thanks to both for proving my point of not taking selective information out of context and using it to achieve a particular policy objective (income tax vs. sales tax).

  18. John Tsitrian

    Troy, my piece focused on the problems created by ag price volatility and e-commerce sales. I did not “add” different arguments. That you’re satisfied with the status quo of dependence on sales taxes as the primary source of the state’s tax revenues is clear. I believe that system is inefficient and out of date, and that volatility in tax receipts will be a continuing issue that needs to be addressed and reformed. When Daugaard starts pruning away at the budget in January, it’s my point, not yours, that will be proven. Take the last word.

  19. John,

    The least volatile source of taxation is property taxes, the middle volatile source of taxation is sales tax, and the most volatile source of taxation is income taxes. A move to a state income taxes would require greater volatility in state spending. The “pruning away at the budget” would occur more often if we had a state income tax. If you want to argue the sales tax is inefficient or out of date, you’d be wise not to use the word “volatility” as it is factually not the case volatility would decrease with an income tax.

  20. W R Old Guy

    Kansas has both an income tax and a sales tax. Gov. Brownbeck’s tax cuts have been a disaster.
    http://www.dispatch.com/content/stories/national_world/2016/11/27/hard-times-for-kansas-as-economic-experiment-creates-gaping-budget-hole.html

    I believe the mention of cutting income tax on certain businesses was the total elimination of the income tax for over 300,000 businesses. There have been some interesting “businesses” started as a means to avoid income taxes.
    http://kcur.org/post/thanks-tax-cuts-bill-self-highest-paid-state-employee-owes-little-kansas-income-taxes

    The Governor insists that he is right and things like the Kansas Supreme Court, Obama’s policies, energy and commodity prices are the problem. It will be interesting to see how the new moderate Republican members of the legislature work with Brownbeck.

  21. Most of the evidence about the failure of any given tax system is really speaking to the perversion or misapplication of that system. Starting from scratch, would anyone really disagree that a truly progressive income tax (repealing all other taxes) is the most fair way to tax a population? Shouldn’t we tax each according to their means. Leave out the loopholes and exceptions, and truly tax wealth.

    I am amazed how often people will vote against their own interests to perpetuate a system that hurts them relative to a progressive income tax.

    I find Sam’s argument on cutting spending a distraction. No matter the system of taxation, government funds should be used for the betterment of society as a whole – no more; no less. Spending that is wasteful ought to be eliminated. I would expect we just disagree on what is wasteful.

  22. I somehow doubt volatility is a primary factor here, because when incomes drop… guess what happens as a result? You guessed it – spending drops as well. When incomes go up, so does spending. They aren’t linked on a 1:1 ratio by any means, but the overall economy has the same general effect upon both.

    If we are worried about budgets, perhaps our wise leaders in Pierre could consider not spending every dime they predict we will collect in any given year. Build in a surplus that can be carried over and change state law to ensure a sizeable surplus can be retained to get through the dark days (years) we will most certainly experience sometime in the future. Any increase in state spending should be tied to the average growth rate for the prior three years and should not exceed that amount. If our economy is not growing, then *surprise* we simply don’t increase spending and hold it steady while pulling from reserves until which point the economy starts growing again.

    People who make higher than average incomes don’t like to talk about income taxes, but the truth is an income tax tends to be better for those of lower and moderate incomes whereas sales taxes are regressive and but a higher burden upon the poor and those with less disposable income.

    I’d think those who profess a connection to Jesus would be the first to suggest an income tax over regressive sales taxes, but I’m old enough to know that people only put their religion out in front when we are talking about issues that won’t impact their personal bank accounts.

  23. mike from iowa

    WR Old Guy- Kansas, under Brown nose, has been a fiscal cluster since he took over.

    He also epitomizes the biggest problem with wingnuts-their inability to admit mistakes and learn from them. He wants to continue bleeding the state dry just in case god dumps a load of ready cash on them out of pity.

  24. Donald Pay

    The point Troy makes is valid, if you are looking at it from a big government perspective. Generally, I look at things from my own perspective. And I suggest you should do the same.

    Income taxes usually are more volatile for the government, but causes less volatility for the individual, because an income tax tracks the macro- and micro-economy more closely than a broad-based sales tax or the property tax. For example, if you get laid off and can’t find work for six months with a resulting loss of half of your income, your income tax owed will go down considerably. That’s good for you, certainly. You can also decrease your sales taxes somewhat by economizing on the non-necessities, but you still have to eat, wipe your butt and buy school supplies. Property taxes are going to go up year after year, and you have little control over them, unless you downsize your property holdings.

    So, you decide what’s best for you. Do you prefer a tax that goes down when your income goes down, or one that remains high while you are struggling? Do you want all your savings eaten up by a sales and property tax that is unforgiving, or do you want a tax that is flexible enough to go down when you are facing tough times. Remember, when you are doing well, you will pay more. That’s the tradeoff.

    Further, I think an income tax makes government more responsible and responsive, especially to the bulk of the taxpayers. Government has to economize right along with taxpayers when the economy goes south, or better, it has to do what you’ve been doing: saving up so it can spend what is necessary during the inevitable downturn. Government starts focusing on the important functions and services it must provide, rather than the gimmicks to make the special interests happy.

    My own preference, of course, is a rational combination of property, sales and income taxes along with some user fees. You get the benefits and limit the faults of all types of taxation that way by mixing and matching. You want a tax system where the wealthy pay more and the poor pay less, and which doesn’t overtax or undertax any one sector.

    Of course, income taxes can be unfair, too. Flat income taxes and income taxes that have too many loopholes for certain wealthy households or corporations can be as bad as sales taxes on food.

  25. Donald,

    I’m with you regarding a healthy mix of taxes which is what we have:

    Federal Government relies mostly on income taxes which is prudent because it can handle volatility by borrowing. State Government relies on sales taxes and bridges the lower volatility with rainy day funds. Local Government relies on the most stable taxation because it needs to never use borrowing for operational needs as it has to maintain a strong bond rating to finance capital projects.

  26. Darin Larson

    Troy, are you really going to try to tell us that this is a good distribution of tax burden in our state?

    http://www.sdbudgetandpolicyproject.org/wp-content/uploads/2013/01/SD-state-local-taxes-2013.png

  27. bearcreekbat

    Darin, that chart, if accurate, says it all by showing how truly regressive SD taxes are. We as a people should be ashamed and embarrassed.

  28. Darin Larson

    Bear, credit John Tsitrian for citing that graph in his article.

    http://theconstantcommoner.blogspot.com/2016/11/outh-dakota-has-to-find-way-to-shift.html

  29. Darin,

    Please explain to me how someone in SD can pay more than 6.5% (state and local sales tax rate) on their income? They can only spend their income once.

  30. Darin Larson

    Troy, the graph cited above by John Tsitrian shows what percent of income that each person in SD pays in state and local taxes each year. As an example, if you are in the bottom 20% for income, the average South Dakotan pays 11.6% of their income in state and local taxes. If you are in the top 1% for income in SD, the average South Dakotan pays 2% of their income in state and local taxes.

    The graph illustrates that in SD we have a tax system that taxes more from a poor person than a wealthy person on a percentage basis. This is the definition of a regressive tax system. On the other hand, an income tax that taxes wealthy income earners at a greater percentage of income relative to poor or middle class income earners is progressive.

  31. bearcreekbat

    Troy’s playing the fool. He knows as well as the rest of us that sales taxes are not the only taxes imposed on SD residents. And I suspect the charts and analysis do not include the property taxes that low income renters pay through their monthly or weekly rental payments to landlords.

    And don’t forget about annual car license taxes, transfer of vehicle taxes, sin taxes, excise taxes passed on by contractors, among others. Come on Troy, you are smarter and better than that.

  32. Roger Cornelius

    Bear,
    And don’t forget all those taxes disguised as fees that we pay for use for parks, etc.
    Rapid City has an additional 1% tax on sales, we are not paying 6.5%, we are paying 7.5% in the city.

  33. Don Coyote

    @Porter Lansing:
    “Jenny … CO has had a state income tax for at least the 40 years I’ve lived here. And, it’s deductible from your federal income tax. It’s always a nice refund check, every spring.”

    FYI, state income taxes are only deductible if you itemize your income taxes which in 2013 only 30% of taxpayers did.

    Also unless your refund check involves qualified tax credits, accountants and financial planners look at large refund checks as a sign of poor planning since the government is just handing your money back to you.

  34. Porter Lansing

    You say that every time, Coyote and it has no relevance. My state’s income tax is a flat rate and not based on deductions or withholding adjustments. State income tax is money to make the state better. Having an extra couple hundred bucks while living in a rundown place with nothing new is no benefit. No new things coupled with a pervasive negativity bias is a big reason no businesses move to SoDak and why the youth hot foot it to more progressive places.

  35. Don Coyote

    @Porter Lansing:

    “You say that every time, Coyote and it has no relevance. My state’s income tax is a flat rate and not based on deductions or withholding adjustments.”

    Then why do you keep bringing it up? The fact that Colorado’s income tax is flat has no bearing on your claim that state income taxes are deductible from your Federal income tax. The deductibility of the Fed income tax is only a bone for the rich and well off who can itemize their taxes and should be eliminated from the tax code.

    I notice your silence on your poor financial planning which results in your “nice refund check”.

  36. Porter Lansing

    Way back when I was working wages and getting a state income tax refund check there weren’t many financial planning options in my day to day choices. You never hear anyone in CO complaining about the state income tax. It’s the reason we have nice things.
    The biggest thing to be proud of in South Dakota is that most people live close to Minnesota where you can go and enjoy the things they’ve built. Having super low taxes and nothing of value is a good thing? What have Republicans built in the last 50 years? Anything that’s lasted came from Washington. Liberals are branded “tax and spend” and need to rebrand as “tax and build”. People love new things and buying and building as a group is the most economical way. Think COSTCO. Start with cleaning up the Sioux River valley from Watertown to Sioux City as one example. Build some things people can be proud of. Businesses will see that and want to be a part.

  37. Darin,

    I know what the chart says but the math doesn’t work. Allocate a persons income to rent (from which there is imputed property taxes) and spending subject to sales taxes that gets to 11%. Doesn’t matter if they make $20k a year or $40k a year.

  38. Darin Larson

    Troy, you might want to look at this:

    http://www.itep.org/whopays/states/south_dakota.php