PLAN, ITEP have overly simplistic approach to tax policy

Geoffrey Lawrence

The Progressive Leadership Alliance of Nevada is promoting a new study from the left-leaning Institute on Taxation and Economic Policy based in Washington, DC. ITEP regularly produces rankings of the state tax systems, with those tax structures that are more progressive receiving higher rankings. Not surprisingly, then, ITEP’s standard recommendation is that states should either implement or expand the relative importance of a progressive income tax. This makes Nevada and other states that impose no personal income tax a favorite target for ITEP.

Apparently the analysts at ITEP have missed an important characteristic of the seven states that impose no personal income tax (Nevada, Florida, South Dakota, Texas, Tennessee, Washington and Wyoming): growth in these states has far outpaced the national average over the past few decades. Personal income taxes that more punitively penalize highly-productive workers discourage those individuals from working or can encourage them to relocate to states that do not have progressive income taxes. Penalizing high earners also impinges on capital accumulation which prevents gains in labor productivity – leading to welfare losses across all income brackets.

The unilateral focus that ITEP places on progressivity causes their analyses to lose sight of some important aspects of tax policy that should not be overlooked. Tax policy has a direct impact on economic performance and can affect economic decision-making through several dynamic channels. An optimal tax structure should seek to accomplish four primary goals: (1) ensuring economic efficiency by minimizing tax-induced distortions in economic behavior; (2) minimizing compliance costs through simplicity; (3) minimizing volatility; and (4) ensuring vertical and horizontal tax equity.

ITEP’s recommendations essentially discard the first three of these goals in order to accomplish a portion of the fourth – vertical tax equity. This is not good tax policy. (A forthcoming policy study by NPRI will demonstrate how it is possible to achieve all of these objectives.)

One of the primary selling points that ITEP uses for its simplistic recommendation is the promise that state taxpayers would pay less in federal taxes – even if they pay more in state taxes. This is because state tax payments are deductible on federal income taxes.* Yet, the impact that tax policy has on economic performance will exist regardless of which level of government receives the tax.

*Deductions are different than tax credits. A deduction means that the gross adjusted income upon which the tax is assessed can be reduced. It does not mean that the taxpayer receives a one-for-one credit on their federal return for state taxes paid. Hence, there would still be a significantly larger overall tax burden even though federal share would be slightly less.

Geoffrey Lawrence

Geoffrey Lawrence

Director of Research

Geoffrey Lawrence is director of research at Nevada Policy.

Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission.  Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association.

From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society.  Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics.  He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation.

Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke.  He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.