The grim state of the states Pt.2
James Heintz: Unemployment and low wages cutting state revenue from sales and income taxes
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington, DC. Now joining us from Amherst, Massachusetts, is James Heintz. Thanks for joining us, James.
JAMES HEINTZ, POLITICAL ECONOMY RESEARCH INSTITUTE: Thank you.
JAY: Let’s get into the roots of this a bit. Obviously, one issue you’ve raised, which is the question of the pressure against having higher taxes in general, but specifically trying to cut taxes during the boom years—but there’s another side to this whole equation, which perhaps goes to the roots of the crisis itself. Most of state and local taxes come through sales tax or land tax, so in terms of property taxes are tanking, partly to do with the general crisis, partly to do with subprime mortgage fiasco. But there’s another issue on sales tax, which is what percent—I guess I should know this, but what percentage is sales tax of state and local revenue?
HEINTZ: It’s hard to answer that particular question because each state has a different tax system. Some states rely entirely on sales tax, and other states have an income tax system and they diversify outside of just sales tax. But those two sources of taxation, sales tax and income tax, account for the vast majority of state tax revenues. Local governments depend on property taxes, largely. The current economic crisis is really undermining the sales taxes and the income taxes. Property taxes, ironically, given the housing crisis, have not been affected so strongly, largely because it takes awhile for the assessed values of properties to actually catch up with what’s happening in the market. So apart from communities that have very high levels of foreclosures, where you actually have nonpayment of property taxes, that source of taxation has not necessarily been undermined. It’s primarily the sales tax and the income taxes. And if we look at income taxes in particular, a lot of states, there’s a particular component of the income tax which are the capital gains taxes, the taxes people pay on their investment incomes and the income that they get from selling their house, for instance, at a higher price than what they paid for it. Those capital gains taxes, many states depended on those taxes for a large portion of their revenues. And when the stock market went bust, when the housing market went bust, it’s those capital gains taxes that are very volatile that disappeared entirely and left the states with no way of replacing those revenues.
JAY: So public school, public education depended on states gambling on the boom in the stock market and the property values.
HEINTZ: Absolutely, gambling on the boom—.
JAY: Crazy way to finance for public education and health care.
JAY: Now, the other side of this is wages. Sales taxes are an important piece of the puzzle for most states, as far as I understand it, but wages have been more or less static since about ’72 while costs keep rising. How much is that a factor in all this?
HEINTZ: You have stagnant wages and you have family incomes. So the whole-household incomes that have grown mostly because women have entered the labor force since the 1970s onward, and now you have two-earner families where once upon a time there was only one-earner family, just to try to keep up with the stagnating wages. And so that’s going to put downward pressures on consumption. But the US economy, as we all know, is a consumer-driven economy. And so that’s led to increased debt burden among households and among families, and it’s those debts, when people lose their jobs, that’s really creating a lot of pressures on consumption now and as result is going to reduce sales tax revenues. And that will add to the state fiscal crisis.
JAY: Now, to what extent do corporations pay tax at the state and local level?
HEINTZ: Well, they pay taxes at the state level. There’s corporate income taxes at the state level. Those have fallen as a percentage of total tax revenue over the past several decades. They used to account for somewhere around 14 to 15 percent of state tax revenues, and now they’re down to about 7 percent of state tax revenues, and this is a serious problem. Because each state has its own separate tax system, corporations often play states against each other in terms of where they’re going to actually locate or register their businesses, and they try to aim for states that have the lowest tax liabilities in their location decisions and their operation decisions. It’s not surprising that the vast majority of corporations in the US are registered in the state of Delaware. It’s because Delaware has some of the most generous tax incentives for corporations.
JAY: So this all sounds like a recipe for a deeper crisis. There’s some talk in Washington about a second stimulus package. Is anything short of that going to stop this from becoming more catastrophic? I don’t know what other word to use, ’cause it sounds catastrophic when you start hearing these numbers.
HEINTZ: Well, in terms of responses, we can think of the short-run responses and then long-run responses. And in the short run, there is really nothing other than a federal stimulus or additional aid to the states that’s going to stop this slide that we’re currently experiencing, and the slide’s going to continue over the next two years even if the economy recovers. And so states really do not have a lot of options. The only options they have [snip] the option to prevent cutting spending, would be to raise taxes at the local level, at the state level, and that’s also not going to necessarily help out the economy. So in the short run what we’re looking at is action on the federal level or having the state fiscal crisis get worse. We can also talk about some long-run remedies that would address some of these imbalances that we’ve talked about.
JAY: Well, in the next segment of our interview, let’s talk about solutions. Please join us for the next segment of our interview with James Heintz on The Real News Network.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee complete accuracy.