Tax Reform: Investing in What Matters

Susanna Hegner

For many Americans, next Wednesday is the most dreaded day of the year. Not only does Tax Day mean settling your debts with Uncle Sam, it also brings the perennial political promises about tax reform. It’s a popular platform: A Pew Research poll conducted last month found 59 percent of Americans believe the tax system is deeply flawed and in need of a complete overhaul. There’s less consensus, however, on what that overhaul looks like. It’s not just the federal tax system Americans find faulty; many are clamoring for reform at the state level as well.

The Arkansas Public Policy Panel has been working for decades to change the tax code. “Arkansas is one of the most regressive tax systems in the country. We tax poor people in this state at twice the tax rate that we tax the wealthy,” said Executive Director Bill Kopsky. “If you make over $250,000 a year, your tax burden in Arkansas is a little over six percent. If you make $17,000 a year, your tax burden is 13 percent. We view it as immoral, we also view it as really bad economic development policy. We think it’s holding the whole state back.”



During the 80s, the Panel worked with then-Governor Bill Clinton on a blue-ribbon commission on tax reform, but were unable to get any changes passed. “It’s a very high burden; it takes a three-quarters majority to reform most taxes in the Arkansas legislature, which means just eight senators can block it, so it’s a daunting task to take on to begin with,” Kopsky said.

Some states have little or no income tax at all, levying sales taxes instead. Advocates say that places an unfair burden on low-income families, who spend more of their incomes on essentials like groceries. “Tennessee has a sales tax which brings in about 75 percent of our revenue,” said Former SOCM Executive Director Maureen O’Connell. “It desperately hits hardest on working-class and low-income people who spend much more of their money on good and services with taxes on them than the rich, who get off on a free ride.”



It’s a similar situation in Alabama, where property taxes are notoriously low and services aren’t taxed at all. Roughly 45 percent of the state’s tax revenue is generated from sales tax, a structure some say undercuts public services and exacerbates poverty. “Our educational system here in this state is built upon a tax structure that absolutely has at its foundation that there’s not a right to education,” said Federation of Childcare Centers of Alabama Executive Director Sophia Bracy Harris. “It’s basically funded in a way where poor communities, low income, disenfranchised communities, particularly rural communities, people of color, where the concentration of people of color, really get the poorest, the smallest amount of funds coming out of the system. So there is no way for people to pull themselves out of poverty when you have a system that really poorly educates the citizenry. What it creates is an environment where growing up is bare and scarcity and a sense of hopelessness in many ways.”



When Louisiana’s governor proposed a plan to lower income tax and raise sales tax, organizers rallied the business community to help defeat the so-called tax swap. “He was gonna get rid of all income taxes and move everything to sales taxes. And we caught a problem in their math and were saying, ‘Look, no. Low and middle-income people are gonna bear the costs of this,’” said Perry Perkins, Supervisory Organizer for the Industrial Areas Foundation. “The head of the Louisiana Association of Business Industry said, ‘Half of our members are small businesses that are gonna get soaked.’ … When that happened, you had both Republicans and Democrats saying to the governor, ‘Back off.’”



Former President of the Mountain Association for Community Economic Development Justin Maxson said Kentucky’s outdated tax system and decades of giveaways are having disastrous effects on the poor. “Many services, from childcare to environmental protection to education, have suffered huge cuts. Our tax code is really organized as if our economy were primarily manufacturing. And the reality is, our economy primarily now are services and we don’t tax services,” Maxson said. “In 2006, we gave $700 million in tax breaks and incentives as our primary economic development strategy. And putting all your eggs in one basket and then giving the basket to whoever the company is, just doesn’t make much sense. We’ve let the recruitment tail wag the economic development dog for three decades.”



For Self Help Credit Union CEO Martin Eakes, these kinds of structural inequities are no accident; they are a tactic in a deeply entrenched moral battle. “Economic inequality will corrode the vehicle that allows us to move forward as a common society,” he said. “Everything that keeps poor people poor has some financial interest that profits from the status quo staying exactly the way it is. So I have learned that the most important skill that it takes in this battle is courage. It’s not about brilliance. It is that once you see the problem, it takes a real fight to actually make progress.”

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[Disclosure: Maxson is now the Executive Director of the Mary Reynolds Babcock Foundation. At the time of this interview, he was President of MACED.]