Essay on State Income Taxes
Number of words: 1496
Evaluating the pros and cons of having no state income taxes.
Introduction
Paying taxes is an inevitable element of surviving in present-day civilization since countries depend on tax income to offer services to their citizens, put up infrastructure and welfare programs. State income taxes, which differ by state, are a percentage of money that citizens pay to the government based on the income they make from their jobs[1]. Some states administer state income taxes, while others like Texas and Alaska do not charge income taxes. But, citizens in such states have to pay various other ordinary state taxes, including property taxes, cigarette taxes, and gasoline tax. Different states have graduated tax systems that charge more as you earn more, putting burdens on higher-income taxpayers than low-income taxpayers. But, other states like Pennsylvania, Michigan, North Carolina, and Indiana charge income taxes at a flat rate.
One advantage of state income taxes is that it reduces the need for the government to collect tax revenue using other means like excise taxes, property taxes, and sales taxes. But, these taxes have negative implications on the economy. State income taxes take cash from people’s pockets which may result in negative consequences to the economy. When citizens own little disposable earnings, buyer spending will decline, which decreases the number of sales companies gain. As a result, companies will have to lay off some workers or even close its operations. This means that the economy of the entire state will be negatively affected. This is why sometimes governments award tax reductions or discounts during economic downturns to alleviate the adversarial effects of income taxes on the economy.
Sources of state revenue in Texas
Texas is a state in the U.S. occupying the south-central segment of the U.S. It became the 28th state in 1845. Texas is among the few states in America with no state income tax. But, someone would ask, without state income taxes, how does Texas fund public services? The straightforward answer to this question is that Texas depends on different sources of tax, mainly property and sales taxes, to provide state services like education and healthcare. In Texas, property taxes are the most considerable means through which Texas delivers public services to its citizens. The property taxes solicited by school divisions cater for the majority of education funding. Similarly, property taxes from local entities such as hospitals, counties, and cities are spent on other local services. Generally, Texans do not pay state income taxes, but they incur the highest property and sales taxes.
What are regressive taxes?
Taxes can be assessed depending on the effects they impose on the taxpayers. Generally, taxes can be divided into three types; proportional, regressive, and progressive. A regressive tax is the type of tax administered in a manner that the tax rates reduce with the increment of the income of the taxpayer[2]. The regressive tax imposes a heavier strain on low-income earners compared to high-income earners. The percentage of the burden imposed on taxpayers is defined by the ratio of the tax value comparable to earnings. Regression taxes can be found in various taxes with equal tax rates. The common types of regressive taxes include;
- Sales taxes
These are taxes inflicted on primary products directly accessible to customers. Given that sales taxes are administered evenly and hit all residential regions in a state, they are classified as regressive taxes.
- Sin taxes
Sin taxes are imposed on products that are rated dangerous to the population. Some of these commodities include alcohol, tobacco, and excessively sugary substances. Sin taxes are profoundly regressive since the consumption of these products differs between high-income earners and low-income incomers. People with poor income levels seem to use more dangerous substances like nicotine than those with higher income levels.
- Property taxes
Theoretically, property taxes can be categorized as regressive taxes. Property taxes depend on the value of the assets and not on the buyer’s capital. Therefore, if a high-income and a low-income individual owns a property of equal worth, they will pay equal rates of taxes. Thus, property taxes are classified as regressive taxes. But, in real scenarios, rich persons often buy higher-value assets compared to persons with low income.
The question of whether regressive taxes are fair or not
Regressive taxes seem fair since they are imposed on all taxpayers regardless of their income. But, at some point, they hurt low-incomers. For example, suppose the government imposes tax on an item. In that case, low-income earners will incur a greater percentage of their earnings on regressive taxes than higher-income earners. Therefore, regressive taxes are fair means generating revenue since everybody pays the same fixed amount of taxes regardless of income level[3].
How the regressive taxes differ from progressive taxes?
Progressive taxes are based on the taxable amount of a person’s income. This taxation structure follows an accelerating schedule; the higher the income, the higher the tax imposed[4]. The overall outcome is that higher-income individuals pay a huge rate of taxes compared to individuals with low-income. The difference between regressive and progressive taxation structures is that with regressive taxation, tax rates reduce with the increment of the income of the taxpayer. In contrast, with progressive taxes, the tax ratio increases with the rise in the income of the taxpayer. Another difference is that regressive taxes puts more burden on low-income earners while progressive taxes puts more burden on high-income earners[5].
Winners and losers of Taxa’s revenue system?
Since Texas relies heavily on sales and property taxes, property owners and businesses are the losers of how Texas generates revenue. Texas’s reliance on these two major sectors means that property owners and business people will forever pay taxes whether the state’s economy is low or high. On the other hand, both Texans who are employed and unemployed are the winners. Since there are no state income taxes, employed Texans only pay taxes through the products they purchase; the same applies to those who are unemployed.
Conclusion
The idea behind the taxation structures used in Texas is quite a burden to some Texans, especially businesses and property owners. Texas does not have state income taxes, which means that Texas residents are heavily burdened because the state attempts to raise revenue using other sources. Besides, the more Texas increases regressive taxes; it might reach a point where businesses can close, and Texans will stop owing higher-value properties to avoid paying Taxes. This means that the economy of Texas will be generally affected. Therefore, if Texas introduces state income taxes, it will help reduce the burden of regressive taxes on the Texans.
Bibliography
Diamond, Peter, and Emmanuel Saez. “The Case for a Progressive Tax: From Basic Research to Policy Recommendations.” Journal of Economic Perspectives 25, no. 4 (November 1, 2011): 165–90. https://doi.org/10.1257/jep.25.4.165.
Nichols, Donald R., and William F. Wempe. “Regressive Tax Rates and the Unethical Taxation of Salaried Income.” Journal of Business Ethics 91, no. 4 (May 28, 2009): 553–66. https://doi.org/10.1007/s10551-009-0131-z.
Szarowská, Irena. “Personal Income Taxation in a Context of a Tax Structure.” Procedia Economics and Finance 12 (2014): 662–69. https://doi.org/10.1016/s2212-5671(14)00391-8.
Weller, Christian E. “The Benefits of Progressive Taxation in Economic Development.” Review of Radical Political Economics 39, no. 3 (September 2007): 368–76. https://doi.org/10.1177/0486613407305286.
[1] Irena Szarowská, “Personal Income Taxation in a Context of a Tax Structure,” Procedia Economics and Finance 12 (2014): 662–69, https://doi.org/10.1016/s2212-5671(14)00391-8.
[2]Peter Diamond and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendation,” Journal of Economic Perspectives 25, no. 4 (November 1, 2011): 165–90, https://doi.org/10.1257/jep.25.4.165.
[3] Donald R. Nichols and William F. Wempe, “Regressive Tax Rates and the Unethical Taxation of Salaried Income,” Journal of Business Ethics 91, no. 4 (May 28, 2009): 553–66, https://doi.org/10.1007/s10551-009-0131-z.
[4] Peter Diamond and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendation,” Journal of Economic Perspectives 25, no. 4 (November 1, 2011): 165–90, https://doi.org/10.1257/jep.25.4.165.
[5] Christian E. Weller, “The Benefits of Progressive Taxation in Economic Development,” Review of Radical Political Economics 39, no. 3 (September 2007): 368–76, https://doi.org/10.1177/0486613407305286.