John Nothdurft: As California dreams, states deal with reality

While Congress and the president recently hiked taxes for 77 percent of the nation's taxpayers, proposals for sweeping tax cuts continue to gain momentum at the state level. As the White House and Congress seem determined to make the U.S. even less economically competitive, states like Kansas, Missouri and Oklahoma are considering a phase-out of their income taxes. The Wall Street Journal correctly calls it a "Heartland Tax Rebellion."

Some analysts cited the fiscal cliff compromise and the passage of Prop. 30 in California ? which increased income and sales taxes ? as evidence the movement for fundamental tax reform has stalled. In the new year, however, an increasing number of governors and influential state lawmakers have announced income tax cuts as being among the top issues for their states in 2013.

File: Julie Gaona, born with cerebral palsy, talks about possible cuts to programs for people with disabilities, at a rally in support of California ballot Proposition 30, on the campus of Los Angeles Cty College Thursday, Oct. 11, 2012. California Gov. Jerry Brown is trying to persuade voters to pass Prop. 30, a $6 billion tax increase on the November ballot, which would boost the statewide sales tax by a quarter-cent and income taxes for those earning $250,000.

REED SAXON, ASSOCIATED PRESS

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The boldest proposal so far is from Louisiana Gov. Bobby Jindal: getting rid of the state's income tax, corporate income tax and franchise tax in one fell swoop. In exchange, the state would broaden its sales tax base. According to the Tax Foundation, Jindal's proposed changes would take Louisiana's business tax climate from 32nd to 4th overall among the 50 states. California is currently 48th on that index.

In the Midwest, Wisconsin Gov. Scott Walker announced his support for lowering the state's income tax. He recently told the Wisconsin Bankers Association, "For us, one of the biggest bangs for our buck is dropping the individual income tax rate, putting more money back in the hands of consumers and small business owners out there so that they in turn can invest that money, they can take out loans, they can move forward and put people to work. We're committed to doing that."

Other states are likewise "committed to doing that." Indiana, North Carolina, Ohio, Oklahoma and others are expected to debate tax reform proposals this year, and more could follow as the rising number of states with competitive business climates and appealing economic conditions threaten to leave high-tax states in even worse economic doldrums.

Nine states already do fine without a personal income tax, including Texas, which is expected to achieve an $8.8 billion budget surplus in 2012?13, according to the state's comptroller. As Heartland Institute Senior Fellow Peter Ferrara pointed out at Forbes.com, "Since 1998, the rate of real economic growth in Texas has been almost 20 percent higher than in California. Since the end of the tech boom and the 9/11 recession, the rate of real economic growth in Texas has been astoundingly almost 50 percent higher than in California," even though the Golden State has natural advantages such as good ports and a fine climate.

The best way to eliminate the income tax would be a gradual phase-out funded by spending cuts and revenue increases that result from economic growth as the state's business climate improves. Reducing the income tax would lead to more jobs and higher wages, which would replace revenue as the lower tax rates were applied to a larger amount of personal income.

As for spending, all the state would have to do to make this work is to cap spending growth at the rate of population growth plus inflation.

Thus, California could move toward eliminating one of the most economically destructive taxes and become a more attractive place for job creators and high-quality workers without cutting current government services.

These tax-and-spending reforms are urgent if Californians are serious about turning the state's economy around and starting to import wealth rather than exporting it. Failure to make real tax rate reductions will put California in an increasing fiscal bind from which it won't be able to emerge until a dwindling state economy forces painful reductions in state spending. The time to act is now, given that numerous other states already have a big head start.

John Nothdurft is director?of government relations for?The Heartland Institute.

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