Fair Tax Combines Flawed Policy With Terrible Politics

Congressional Republicans shouldn’t surprised they’re under attack now that the Fair Tax, a proposal to replace the federal income tax with a 30% national sales tax, is under consideration at the behest of a single Georgia congressman. It’s been known for a longtime that simply expressing potential support for the Fair Tax, let alone bringing legislation up for a vote, is enough to subject lawmakers and candidates to attacks.

The fact that the Fair Tax causes disproportionate harm to retirees living on a fixed income is just one of many reasons why Republicans will not pass the Fair Tax this year and why it may not even make it to a floor vote in the House of Representatives. The pitfalls of the Fair Tax, from both a policy and political standpoint, have been evident for more than a decade.

“Every election cycle, candidates that endorse (or even say nice things about) the FAIR tax wind up getting attacked and put on the defensive,” economist Dan Mitchell pointed out back in 2010, underscoring how the political toxicity of the Fair Tax is not a new revelation. “Many pro‐tax reform candidates have lost elections in favorable states and districts, largely because their opponents were able to successfully demagogue against a national sales tax.”

Mitchell isn’t the only one who has warned about the dangers of supporting the Fair Tax. The perils of endorsing the Fair Tax were also documented by the Wall Street Journal editorial board the same year Mitchell published the aforementioned observations:

“In 16 House and three Senate races so far, Democrats have blasted GOP candidates for at one point or another voicing an interest in the FAIR tax,” a 2010 Wall Street Journal editorial noted. “FAIR tax proponents are right to say these Democratic attacks are unfair and don’t mention the tax‐cutting side of the proposal, but the attacks do seem to work.”

Some who failed to heed these warnings in subsequent election cycles have suffered the consequences. Congresswoman Nancy Mace, for example, discovered this first hand in her 2020 race in which she beat Joe Cunningham by a razor thin margin.

The Democratic Congressional Campaign Committee ran TV commercials that election cycle telling voters in South Carolina’s first congressional district that “Mace supports a 23% tax increase on nearly everything we buy. The family groceries. Medical procedures. Even prescription drugs for seniors. Mace’s plan taxes ‘em all. Twenty-three percent.”

Fair Tax supporters don’t need to feel dejected just because Congressman Buddy Carter’s (R-Ga.) Fair Tax bill won’t pass, even in a Republican-led House. There is a case to be made that Fair Tax supporters are winning, but those victories are coming at the state level, where legislators and governors have made significant progress in moving away from income taxes as the way to fund government over the past decade.

Governors and lawmakers in more than 20 states have cut individual income tax rates over the past two years alone. At the beginning of this year, income rate cuts took effect in Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire, New York, South Carolina, and North Carolina. In fact, average state income tax rates have fallen in recent years and are poised to continue doing so.

After all of this progress in reducing state income tax rates and overall tax burdens in recent years, lawmakers and governors in many states aim to enact more income tax rate-reducing and eliminating tax reform in 2023. In Arkansas, for example, Governor Sarah Sanders said her goal is to phase out the state income tax. West Virginia lawmakers passed a significant income tax cut in mid-January. Wisconsin Senate Leader LeMaheiu is proposing a 3.25% flat income tax phased in over four years. North Carolina Senate President Phil Berger said he’d like to get North Carolina’s income tax rate down to 2.5% to match Arizona. Even in Arizona, lawmakers are looking to cut their new 2.5% flat tax, the lowest flat income tax rate in the nation, further in 2023.

New Hampshire is now set to become the ninth no-income-tax state at the end of this year. Though there is no tax on wage income in the Granite State, there is a tax on dividend and interest income. Thanks to the budget signed into law by Governor Chris Sununu two years ago, however, New Hampshire’s investment income tax is scheduled to phase out by the end of 2026.

New Hampshire legislators are now moving forward with a proposal to speed up the elimination of that tax. House Bill 100, if enacted, would repeal the investment income tax by the end of this year. When New Hampshire’s investment income tax is eliminated, New Hampshire will become the ninth true no-income-tax state and the ninth state with what is effectively a Fair Tax. That, coupled with Tennessee lawmakers’ repeal of their investment income tax in 2021, marks a 28% increase in the number of true no-income-tax states in the past few years alone.

When it comes to the Fair Tax debate currently roiling Washington, it may all have stemmed from inaccurate reporting or a simple misunderstanding in fog of the late night speakership vote. Senate Majority Leader Chuck Schumer lambasted what he called “the Republican national sales tax” during a January 24 press conference. Yet reporting published only a few hours prior to Schumer’s remarks calls into question whether the Fair Tax really was part of the deal that secured the speakership for Kevin McCarthy.

“I’ve been hearing that this was part of the negotiations, that it would be brought to the floor for a vote,” Congressman Buddy Carter told a reporter for The Hill, with Carter adding that McCarthy did not make any promises regarding a vote on the Fair Tax. “I don’t know that he made promises to anyone,” Carter said.

Recent comments from Speaker McCarthy indicate no floor vote on the Fair Tax is imminent, and that Representative Carter’s bill will be subject to regular order, meaning it first has to be considered in committee. “All he [Congressman Buddy Carter] did was introduce a bill,” Speaker McCarthy told Larry Kudlow during a January 24 interview. “For a bill to get to the floor, it would have to pass the committee.”

When asked by a CNN reporter the evening of January 24 whether he supports the Fair Tax, Speaker McCarthy responded with a clear and simple “no.”

When the Fair Tax bill is ultimately defeated in Congress, whether that happens in committee or on the House floor, many Fair Tax supporters will be upset. But Fair Tax enthusiasts, rather than be dejected, could instead take heart in state level developments and consider adjusting their focus to state capitals. The impediments to federal adoption of a flat tax appear insurmountable, not just for political but also policy reasons. In the states, however, not only is adoption of the Fair Tax’s move to a consumption tax base possible, it’s happening.