Zodrow, George R.
College Station, TX: Texas A & M University Press (204 pages)
States facing increased revenue demands are usually forced to choose between two options: relying on a state income tax system or utilizing a state sales tax. Using a purely economic perspective, this book presents a comprehensive analysis of the advantages and disadvantages of using either type of tax. More specifically, Zodrow evaluates the two options in terms of economic efficiency, fairness, administrative simplicity, and tax exportability. He also considers two possible alternatives to the sales and income taxes--increased reliance on user charges and adopting a tax on consumption with minimally progressive features. In the final chapter, Zodrow applies his analysis to the current tax system in Texas, one of the last states without an income tax.
Drawing on the public-finance literature, Zodrow outlines a desirable tax system as one that fulfills the following criteria: 1) it exports tax burdens to outof-state residents; 2) it is efficient; 3) it is equitable; 4) it provides an adequate and stable revenue stream, and 5) it has low administrative, enforcement, and compliance costs. The book compares income and sales taxes based on the criteria listed above.
Chapters 3 and 4 analyze sales vs. income taxes using the criteria of exportability and efficiency. Exportability is the extent to which a state can shift its tax burden to out of state residents. There are two ways state tax burden can be exported to out-of-state residents: through deductibility against federal tax liability or by exporting tax burdens through price changes. Under current federal law, only personal income taxes are deductible from an individual's federal tax liability. Therefore, the deductible portion of the state tax burden is effectively exported to taxpayers in other states, and income taxes are clearly preferred over sales taxes.
Exporting tax burdens through price changes is far more difficult under either tax option. Most business taxes are borne by relatively immobile factors like land and labor or by in-state consumers. The owners of these immobile factors and consumers bear the burden of tax, that is the excess inefficiency cost that can be attributed to the outflow of capital promoted by the tax that reduces the productivity of the state's labor and land resources. Because of these factors, there is little potential for tax exporting through price changes.
Thus, the very...