State taxes are terrible
All across the country, Americans are putting the finishing touches on their taxes. There are many reasons it's such a grind. But one big factor that doesn't get mentioned that much? The fact that we have to pay state as well as federal taxes.
This is a terrible idea. State taxes are far worse than federal ones, and we should try to get rid of them as much as possible.
First off, state taxes are incredibly regressive. They often rely heavily on things like sales taxes and excise taxes instead of income taxes. As a result, they hit the poor a lot harder than the rich. The federal government, by contrast, relies much more on the progressive income tax, which cuts the poor and working class a break. For whatever reason, the federal government's political incentives seem to push its tax system in a much more just and humane direction.
The next problem is one of geographic mismatch. Sure, different regions have different industries with different needs and challenges. Rural areas and small towns have different economies than major cities. But this economic geography doesn't match up at all with how state boundaries are drawn.
This mismatch leads to all sorts of weird problems. Consider how many vendors on websites like Amazon don't pay state sales taxes. That's due to a 1992 Supreme Court ruling that the justices are now revisiting, which said that states should only tax businesses with a physical presence within their borders. That might make intuitive sense, but brick and mortar shops angrily argue it tilts the competitive playing field against them. And of course they're right. But then should a state government be able to tax a business that will never be affected by its spending or regulatory decisions?
There are other examples too, like how lawmakers blow holes in their own tax codes trying to tempt employers and big businesses to set up shop in their state. This doesn't increase the total number of jobs being created in the U.S.; it just reshuffles their geographic distribution.
These issues are all inflamed by a third problem: State governments don't control the currency they tax and spend in.
It's the federal government that controls the supply of U.S. dollars. It can create as much money as it wants out of thin air. Which gives the federal government unique and extremely useful fiscal powers: It can never suffer a debt crisis. When recessions hit and tax revenues collapse, the federal government doesn't have to cut spending to balance the books. It still has to tax, but only to control inflation and keep the economy from overheating.
States do not have these advantages. They still have the ability to borrow, and should make more use of it — the fact that most states have a balanced budget amendment is insane. But at bottom, if state governments don't get tax revenue, they don't have any money to spend. Unfortunately, states are also responsible for critical public goods like health care and education, which chew up large portions of their budgets.
The responsibility for financing Medicaid, for example, is divided between the federal government and state governments. Most funding for K-12 schools still occurs at the local and state level, and much of it comes through local property taxes. Local municipal governments have the same problem as state governments, and their reliance on property taxes comes with perverse distributional consequences: The wealthiest school districts pay the highest taxes, and thus get the most resources. These public services aren't any less necessary in a recession, but states nonetheless have to cut them down when the economy tanks — or slash away at all their other programs.
Then there are retirement pensions for state government employees, which can also be a burden on state budgets. Granted, reports on the scale of the problem are often overblown or sensationalized. And state lawmakers do themselves no favors by playing political games with the taxes necessary to fund their pension plans. But the fact is, making sure retired workers still have enough income for a decent standard of living is a job much better suited to the federal government's powers.
Of course, we can't just abolish state taxes outright. That would require a constitutional amendment.
But we can render state taxes largely unnecessary.
We could fully federalize Medicaid, for instance. Medicare is already run entirely at the federal level. There's no reason Medicaid couldn't work the same way. We could go even further, and pass a national single payer program. Either option would free state governments from the need to raise that tax revenue.
We could accomplish something similar by making Social Security far more generous. This needs to be done regardless. But with a more generous federal retirement program available to all, the need for state governments to provide separate pensions would become less acute. Of course, a lot of state employees simply don't get Social Security because they get a pension instead. And moving those Americans onto a reformed version of Social Security would be exceedingly tricky. But at the very least, state governments could start putting new employees on the federal program instead.
As for education, one thing the federal government could do is start sending state and local governments permanent streams of money, with no strings attached, calculated to their populations and poverty levels. In fact, we could do this to help states with all their spending needs. And once upon a time, we did, with a program called revenue sharing. But it was discontinued in the 1980s. The federal government should revive it, and make it much, much bigger. States could still spend the money as they wanted. But they would no longer need to raise the tax funding themselves, or live in perpetual fear of the next recession.
After all these changes, state lawmakers could still levy their own taxes if they wanted. But they'd have fewer reasons to. Of course, the federal government would have to hike its taxes even as states scaled theirs back. But that would place the fiscal responsibility where it always should have been.
And it would certainly make tax day far less complicated.