Bobby Jindal (R-LA), Dave Heineman (R-NE), and Sam Brownback (R-KS) have announced plans to end their states’ income taxes, while North Carolina’s Republican state senate leader Phil Berger is calling for the same, with at least some backing from GOP governor Pat McCrory.Most conservative policymakers at the federal level just want to sharply reduce the income tax, not eliminate it entirely. But more and more Republican-controlled states are deciding to go big or go home. So far, Govs.
This isn’t unheard of at the state level. Seven states
— Alaska, Washington, Nevada, Wyoming, South Dakota, Texas, and Florida
— lack any individual income tax, while Tennessee and New Hampshire
only tax interest and dividends, leaving wage income untouched. That
means we have a fair bit of information on what differs between states
that tax income and those that only tax sales (including tobacco,
alcohol, etc.) and property. So what do we know about abolishing income
The Institute for Taxation and Economic Policy, a left-leaning think tank, estimated
in its “Who Pays?” report, which regularly tracks the distributional
impact of state tax policies, that states without income taxes place a
higher tax burden on the poor and a lower burden on the rich than states
with income taxes. Here are the latest numbers, using tax laws as of
January of this year:
This isn’t a totally fair comparison, as, with the exception of
resource-rich states like Wyoming and Alaska, income tax-less states tend to have less tax revenue
than states with income taxes do. So of course rich people would pay
less taxes there! But the comparison holds up if you try to compare
apples-to-apples. For example, in 2009 Colorado (which had an income
tax) had per-capita state revenue of $3,876, while Texas (which didn’t
have an income tax) had per-capita state revenue of $3,881, according to
the right-leaning Tax Foundation.
So a comparison between the two is pretty apples-to-apples. And
unsurprisingly, Texas, with no income tax, has a much more regressive
So it’s pretty clear that getting rid of income taxes makes state tax
codes more regressive. Does it help growth, at least? The evidence here
is murky at best. Economists generally prefer consumption taxes to
income taxes, which would seem to argue for a shift from taxing income
to taxing sales. But as Nicholas Johnson, director of state policy at
the Center for Budget and Policy Priorities, explained
the first time Jindal floated this idea, state sales taxes aren’t
particularly good consumption taxes. Typically, many services are
exempt, and business-to-business transactions are taxed more than
optimal consumption taxes would have it. Jindal’s specific plan focuses on limiting exemptions to the sales tax, which could blunt some of these concerns.
ITEP, understandably, is skeptical
of claims that state tax changes make a meaningful change to growth.
Comparing states on economic metrics is maddeningly difficult, as the
number of potential factors influencing performance, from weather to
migration patterns to federal subsidy levels, are so numerous. But on
the most immediately evident metrics, there doesn’t appear to be much if
any difference between states without income taxes and states with
The academic literature is divided on the question. Economists James Alms and Janet Rogers found
the effects of individual income tax levels to be quite variable
between states, and never significantly negative (that is, high rates
never led to a significant decline in growth rates). The University of
Oklahoma’s Robert Reed and Cynthia Rogers found no evidence
that income tax cuts in New Jersey in the 1990s improved economic
conditions, while Hunter College’s Howard Chernick and Paul Sturm found no evidence
that rates on wealthy individuals affected growth, and some evidence
that taxing the poor heavily through income taxes hurt growth. Drew
University’s Marc Tomljanovich found some effects of tax rates on state growth in the short-run, but none in the long-run.
But plenty of studies have found the opposite. Barry W. Poulson and
Jules Gordon Kaplan, in a study published by the Cato Institute, found a significantly negative effect of state taxes on economic growth, including income taxes. Thomas Dye and Richard Feiock found that state income taxes reduce (pretax) state personal income, as do Randall Holcombe and Donald Lacombe.
Even those studies concede that there are many more important factors
in determining state economic growth than are state tax levels. And
most of them don’t differentiate strongly between types of taxes, or
find strong differences in the effects (if they exist or not) between
types of tax. So the evidence that scrapping income taxes and replacing
them dollar-for-dollar with sales or property taxes would help growth is
thin at best. And the evidence that that change would increase taxes on
poor people and decrease them on the rich are considerable. Depending
on your political preferences, that could be a poor bet.
Update: ITEP writes in to note that the data here is actually from January 2013 not 2009. We apologize for the error!