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29 Tax Features 1 (1985)

handle is hein.tera/taxfeaturs0029 and id is 1 raw text is: VOL. 29, NO.1  JANUARY1985

TAX FEATURE
7       President's Support Crucial
Tb Gain Tax Restructuing in '85

State Taxes to Climb
By $2.2 Billion Net
Due to 1984 Legislation
Ater three years of major tax-raising ac-
tivity, and benefiting from a year of strong
economic growth, the states in 1984 en-
acted laws that will have only a minor
overall effect on the level of taxes.
Tax action in at least 20 states will either raise or
lower burdens-but will have only a small aggregate
impact. The net effect, Tax Foundation researchers re-
port, will be to raise state-level taxes nationally by
about $2.2 billion.
Measured against the $197.0 billion collected by
states during the 12-month period ending June 1984,
that's a hike of only one percent. Laws enacting in-
creases totaling $3.3 billion in one or more of the major
taxes in 11 states will be partly offset by $1.1 billion in
tax cuts in nine states.
Tax hikes in Texas, Louisiana, Tennessee,
Oklahoma, and South Carolina account for about 95
percent of the overall increases approved in 1984, say
Tax Foundation economists. To support major in-
creases in spending for public schools and highways,
Texas raised a wide variety of taxes, with the increases
expected to provide an additional $1.6 billion or 17 per-
cent annually. Louisiana's tax package also involved
many separate levies on consumers and businesses
and will raise taxes in that state by an estimated $750
million annually (25 percent). The 1984 hike in Loui-
siana followed another $153 million a year increase in
personal income taxes enacted by a special legislative
session in December 1983.
Tennessee boosted its tax revenues by about $330
million annually (14 percent) by increasing rates for
general sales, corporate franchise, and insurance pre-
miums taxes. In Oklahoma, where state finances were
adversely affected by the recent downturn in the oil
and gas industry, the legislature approved higher
taxes of over $270 million annually (11 percent), mainly
from increases in general sales and motor fuels levies.
To fund educational improvements, South Carolina
boosted its taxes by about $170 million (8 percent) by
increasing its general sales tax rate.
Other states raising a major tax were: Alabama (ciga-
rettes); Arizona (cigarettes, tobacco, and liquor); Con-
necticut (motor fuels); Maine (cigarettes and
(Continued on page 4)

Unless the President gets behind it with his
tremendous personal popularity, major
tax restructuring has no chance, John E.
Chapoton, formerly a top Treasury official
in the Reagan Administration, told Tax Foundation's
36th National Conference. Chapoton, now a partner in
the Washington law office of Vincent & Elkins, empha-
sized that deficit reduction is the number one issue
and will remain so for the remainder of this decade
and probably beyond.
The tax system works, although many complain that
it works poorly. Indeed, as bad as it is, Chapoton
said, it may be the best and fairest tax system in the
world.
In arriving at those conclusions, the former As-
sistant Secretary of the Treasury for Tax Policy began
by reviewing the evolution of tax policy since the
1960s. He pointed out that the system in the early years
of that decade was a basically flat tax, although not
many people realize that fact. Most payers filed at a
rate of 22 percent or lower.
In the 1970s, inflation pushed up the top tax rates
faced by middle-income taxpayers at a time when leg-
islated tax reductions tended to lower the rates at the
bottom. These changes caused marginal tax rates to in-
crease much faster than average tax rates and much
faster than total revenues from the individual income
tax system increased, he noted.
Congress responded with periodic tax reductions,
culminating in 1981 in the Economic Recovery Tax Act
with a 25 percent reduction in marginal rates across the
board, plus indexing of the tax brackets to begin in
1985.
At a time when more taxpayers were being pushed
into higher brackets, Chapoton observed, changes
were occurring in the base. He cited retirement provi-
sions and employer-provided health insurance as ex-
empt areas that have grown dramatically. Internal
Revenue Code provisions for removing income from
the tax base, modest when enacted, he said, have
swelled to almost gigantic proportions.
The tax system influences behavior, Chapoton
said. If we offer a form of tax-favored compensation,
we should expect to see a shift in attitudes in employ-
ers and employees to the tax-favored form of compen-
sation. This creates a cycle where rates rise to keep
revenues constant, further encouraging shifts into
areas exempt from taxes.
Also, Chapoton noted, inflation has eroded the
value of the personal exemption, offsetting the reduc-
(Continued on page 2)

THIS
ISSUE:
PAGE 1:
Tax
Restructuring
State Taxes
PAGE 2:
Deficit
Reduction
PAGE 3:
Taxes and
Politics
Front Burner

Internal Reve-
nue Code
provisions for
removing in-
come from the
tax base, mod-
est when en-
acted, have
swelled to al-
most gigantic
proportions.

TAX FOUNDATION'S

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