The State of State Income Taxes

Perhaps in response to the Obama administration’s promise of raising taxes to burdensome levels on American taxpayers, some Republican-led states are now considering doing away with their states’ income taxes.  Instead, the states will bring in revenue with increased sales tax and/or by reducing business exemptions to the sales tax.  While the debate is sure to be heated, with Democrats already on the defense, the evidence for ending state income taxes is clearly on the Republicans’ side.

Currently, nine states have no state individual income tax – Texas, Tennessee, Florida, Washington, New Hampshire, Nevada, South Dakota, Wyoming and Alaska; however, New Hampshire and Tennessee tax dividends and interest income.  Nevada, South Dakota and Wyoming also have no corporate income taxes.  The Republican-led states weighing whether they should abolish their state personal and corporate income taxes are Louisiana, Nebraska and North Carolina.  Oklahoma and Kansas are also working to gradually phase out their states’ income taxes.  According to Forbes, the move to no state income taxes would be a wise one considering the economic histories of the states that have gone without:

Economic growth in the 9 states without income taxes skyrocketed from 1998 to 2008 almost 50% faster than in the 9 states with the highest top personal income tax rates. Job growth rocketed ahead more than twice as fast in the 9 no income tax states as compared to the 9 top income tax rate states.

And what of the 11 states that are relatively new to having state income taxes?  Forbes continues:

All 11 states grew more slowly than the rest of the country after adoption of the income tax…

Moreover, per capita income relative to the U.S. average declined substantially after adoption of state income taxes in all 11 states…

[I]n 9 of the 11 states, after adoption of the state income tax, total state and local tax revenues in the state as a percent of total state and local revenues in the U.S. declined as well, in some cases sharply.

What this means is that in these states all they got for paying state income taxes was a lower standard of living.

Democrats are already resisting the idea of removing state income taxes, yet offering no plans to spur their states’ economic growth.  Instead they claim the tax burden would be shifted from the wealthy to the poor.  In Massachusetts, Democratic Gov. Deval Patrick is hoping to raise the state’s income tax and lower the sales tax.  

However, relying on the sales tax, or consumption tax, would be more in line with the Democrat’s desire for everyone to pay their fair share.  Citizens only pay for the goods they use and, in Nebraska’s case, sales tax exemptions for food would remain.  As laid out by Bonnie Lee, at FOXBusiness, “a consumption tax would be a true progressive tax if properly constructed. For example, groceries and other necessities may be exempt or taxable at a low rate. Larger-ticket items for those who can afford the finer things would be levied at a higher rate.”  Unlike income taxes, sales taxes provide additional revenue by those who ordinarily avoid paying taxes by working under the table or illegally; visitors to the state would also increase revenue.

It’s clear that something must be done to shore up the states’ budgets and create solvency in the long-term.  Ending state income taxes would not only provide the working class with more of their own paycheck, it would allow them to spend it or save it in ways that governments have shown they are incapable of doing.

Luckily, there appears to be leadership that is willing to make these changes and catch up with states that have already dropped the income tax.  To quote Kansas Gov. Sam Brownback, “Look out Texas, here comes Kansas.”