Backers of 'simple tax' hope to trigger a nationwide trend
The road to a simple, flat-rate federal income tax - scrapping the present byzantine tax code - may be paved with state ballot initiatives. This is a notion that has begun percolating in California.
If the state's Proposition 13 led the way in 1978 for a tax-cutting mood that swept the nation, perhaps a popular vote for a flat-rate state income tax could set off a similar movement.
So contends public-interest lawyer Robert Gnaizda. He wrote an article for a San Francisco newspaper little more than a month ago proposing a tax simple enough to fit on a post card. Already it has provoked enough interest that Mr. Gnaizda sees a substantial chance for a petition drive to put the simple tax on the state ballot in 1984.
The California ''simple tax on a post card'' is two-tiered. It would tax all income at a rate of 4 percent, or 7 percent for people with incomes over $50,000 . It would exempt $7,500 per taxpayer, $15,000 per couple, and another $1,000 per dependent.
Already California legislators have asked the Franchise Tax Board to chart out how the simple tax would bring in money and how it would spread the tax burden.
There are 23 states that have initiative processes, Gnaizda points out, so if legislators can't face down lobbyists who favor a more complicated tax structure , voters can.
Flat-tax bills are often bipartisan. Who supports them and who opposes them usually depends on how the bills are structured. Conservatives tend to favor low rates; liberals generally prefer high personal exemptions, to make the taxes more progressive. Gnaizda's proposal allows no deductions except for the basic personal exemptions. This could make waves for homeowners who deduct interest payments or charities that profit from tax-deductible contributions.
Five states already have flat-rate state income taxes: Illinois, Indiana, Massachusetts, Michigan, and Pennsylvania. Rates range from 2.2 percent in Pennsylvania to 6.35 percent in Michigan.
Missouri has a Republican-sponsored 3 percent flat-tax bill in legislative committee now that won't get out during this year's session, according to Jack Pierce, a Missouri House research analyst. ''But it will surface again,'' he adds.
Kentucky Gov. John Y. Brown, a Democrat, is trying to get his legislature to call a special session to consider a flat rate of roughly 4 percent. The Kentucky Revenue Department figures the plan will make state taxes more fair and much cheaper to collect.
''The reason this flat-rate tax plan is appealing to us is that it's progressive,'' says an official there. ''It's a mild shift of the tax burden from lower income to higher income.''
And while almost half of Kentucky's taxpayers itemize their state deductions now, the revenue office expects only 5 or 6 percent would itemize the few deductions allowed under the flat rate.
Overall, the office says it would save anywhere from $1 million to $2 million every year in tax-administering costs.
What little evidence there is suggests that people in flat-rate states like their system. A 1976 initiative in Massachusetts to replace the flat tax with a graduated tax was voted down 2 to 1. A similar initiative failed by a 4-to-1 margin in Michigan in 1974.
''After you spend hours and hours on the federal form, you can fill out your Illinois tax form in 10 to 15 minutes,'' says Doug Whitley, president of the Taxpayers' Federation of Illinois.
Although the Illinois tax could be made more fair by raising exemptions and cutting taxes on food and drugs, Mr. Whitley says, ''It's been a productive tax; it's been a stable tax; and it's been a predictable tax.''
The simplicity of it, he adds, has discouraged legislators from tacking on deductions and credits. ''In a simple system, a change sticks out more.''
''It became clear to a number of us (in his law firm, Public Advocates Inc.) that hardly anyone understands the tax system, including us,'' Gnaizda explains.''
In California, state lawmakers have dabbled with flat-tax proposals before, says Al Desin, director of the statistical systems bureau of the Franchise Tax Board. But they have found that when Mr. Desin runs the tax rates through his mathematical model, too much tax has shifted from the upper to middle incomes. ''They don't want to be held responsible for that.''
Gnaizda's tax, though, at least on a rough run-through, resulted in a fairly even spread - and slightly lower taxes for most people at all income levels.
The difference was that those wealthy persons who would pay more taxes would pay a lot more. The key factor is that the Gnaizda plan would not allow deductions for capital gains.