Of the 50 states in the United States of America, only nine do not have a broad-
based personal income tax. Most states rely on an income tax as a major part of their
budget, in addition to various other taxes and federal monies. While some may suggest
that Florida institute a state income tax, a reduction in income tax can cause better
economy, higher population growth, and lower unemployment.
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State income tax systems are typically progressive. A progressive income tax is
structured so as income rises, the percentage paid in tax rises as well. There are two
other main types of tax: regressive and proportional. Regressive income tax is structured
so as your income rises, the percentage you pay in taxes decreases. A proportional tax is
a flat percentage, regardless of income. (Progressive or Regressive, Who pays what?)
A report from the Nelson A. Rockefeller Institute of Government in Albany, N.Y.,
says the "biggest threats to state governments are reliance on 'volatile' personal
income taxes and loss of sales tax revenue." The Institute determined that, in a time of
lower capital gains, the following states will suffer decreased state income tax revenue:
Colorado, Oregon, New York, Connecticut, California, Minnesota, Massachusetts,
Virginia, Idaho, and Maryland. (A new study [ . . . ] probably will fall)
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One detriment of income tax is that it discourages production. Rather than
being taxed on what they consume, people are taxed on what they produce. This causes
worse economy compared to other states, and it also reduces the amount of large
corporations residing within a state. On average, per capita personal income growth
increases by 3.6% with a 1% reduction in state tax burden (NCPA - Tax Issues).
Increased personal income assists in building a solid economy, and revenue from sales tax
is increased due to consumer spending. The following information was found by
economist Debra Roubik, referring to Arizona's possible economic status by the year
2016:
Eliminating the Arizona income tax would lead to a 42 percent
increase in personal income above projections under the present system.
606,400 more jobs would be created.
More and better-paying jobs will lead to more sales tax revenue collections,
and by 2016 the state would gain almost $9.6 billion in retail sales over the
forecast increase. (Roubik, Debra)
The Oklahoma State Senate's Press Release of January 3, 2001 provides some
useful information regarding state income taxes. At the time, Oklahoma was considering
the 'Texas Plan', which would adapt Texas' tax system to the state of Oklahoma. The
plan would eliminate Oklahoma's state income tax and hopefully help to expand their
dropping population, regaining previously lost congressional representation. The Senate's
statistics showed how states without an income tax were benefiting more than those with
an income tax. According to Sen. Taylor:
Like it or not, people and businesses tend to gravitate toward states that don't
levy an income tax. It's a phenomenon that occurs in our state almost daily.
Everyone knows a friend or business associate who has pulled up stakes in
Oklahoma and headed south to Texas to seek a friendlier tax climate. If we don't
do something to stop that exodus, we can write off any hopes of regaining the
congressional seat we lost in the last census.
The Oklahoma Senate found that several states without income tax experienced greater
population growth, and added as many as four congressional representatives in
comparison to Oklahoma's loss of one representative. At that time, Oklahoma only had
two Forbes 400 companies. Income tax-free states such as Texas, Florida and
Washington had a substantial number of such companies, with 34, 16, and 15
respectively. (Oklahoma State Senate Press Release)
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In Virginia, 53 economists signed a letter stating that "the income tax causes the
most economic damage per dollar collected,"(Sanford Plan). The letter was written in
support of South Carolina gubernatorial candidate Mark Sanford's plan to phase out
state income taxes. Sanford's proposal would "gradually lift this obstacle to economic
growth". According to National Taxpayers Union President John Berthoud:
Citizens will benefit even more quickly and fully from the repeal of South
Carolina's income tax because the Sanford plan also calls for common-sense
restraint on the explosive growth of government spending.
The letter's conclusion says that it would be a wise decision for South Carolina to
institute the Sanford plan, and that other states should follow suit in income tax
reduction. (Sanford Plan)
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There are numerous examples where tax reduction caused positive results, not
only in economy, but also in population growth and unemployment reduction. The
CATO Institute compared the top 10 tax-cutting states with the top 10 tax-raising states.
Their findings demonstrated how reducing taxes can be greatly beneficial, and raising
taxes can adversly affect a state in various ways.
**********
According to CATO Insitute's study, employment in the ten tax-raising states
actually fell slightly in the period between 1990 and 1995. On the contrary, states that
cut taxes experienced an average 10.8% in employment growth. Population gain in
tax-cutting states was 7.4%, but only 4.8% in those states that raised taxes.
(CATO Institute). Additional statistics show a total income increase of 32.6% and a per
capita income growth of 21.8% for tax-cutting states. States that increased taxes didn't
do as well, with total income increase of only 27.0%. Their per capita income increase
was slightly higher than tax-cutting states, with a figure of 23.4%. However, tax-cutting
states still demonstrated a $400 per capita income increase in comparison to the higher
tax states.
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Arizona is a good example of the effectiveness of tax cuts. Employment was
actually falling two years before a $1.5 billion cut, which was initiated in 1992 under
Governor Fife Symington. The top income tax was lowered from 8.7% to 5.6%, and
corporate income tax was reduced as well. After the tax cuts, job creation, state
population, and new business creation skyrocketed to three times the national average.
**********
CATO Institute's study declares "No state has turned around its fortunes as
dramatically as California in recent years." Their figures support this claim. In 1990,
the Governor of California was Pete Wilson. Gov. Wilson and the California
Legislature enacted a $7 billion tax increase, the largest in the history of all 50 states.
The tax increase failed to increase state revenue and caused high-income families and
entrepreneurs to leave the state, causing the an even deeper recession. The already poor
economy fell even further, and from 1990 to 1993 California lost 350,000 jobs. The
tax hikes were repealed in 1995. California regained 150,000 jobs by September 1996,
and the unemployment rate was drastically lowered.
**********
1991 brought about the largest tax increase in Connecticut's history. Governor
Lowell Weicker levied a personal income tax on the state. This caused many people to
move out of Connecticut and into more tax-friendly states. Governor John Rowland
enacted a $200 million tax cut in 1995, reducing the budget to general assistance
welfare, public housing aid, and transportation funds; state hiring was also frozen.
The tax cuts helped Connecticut to recover from its economic crash, and by 1996 the
state had recovered one third of the 125,000 jobs that were lost between 1990 and
1995.
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In September 2001, Dr. Richard Vedder of Ohio University released a 28 page
report entitled "Taxes and Economic Growth". Dr. Vedder made several comparisons in
his report, and concluded that income tax is detrimental to a state's financial well-being.
Vedder states "The income tax is the worst of taxes. It's a tax on labor, on production, on
what people contribute to society." He also mentioned how many people move from
states which tax income to states that don't, saying "With the exception of Sundays, some
one thousand persons moved every day for nine years to the no-income-tax states".
That's a total of three million people per year leaving for states that do not tax income.
Vedder has a strong opinion on the subject of taxes. He says "They should cut
government spending. They should also let private industry compete for operating state-
run programs, such as university dormitories, prisons, public school transportation and
cafeteria services, and highway maintenance, [ . . . ] What they should not do, however, is
raise taxes." If an income tax-free state decides to levy an income tax, they should also
be prepared for additional governmental spending due to collections requirements and
more government employees to manage the collection of income tax. Contrary to what
some may believe, it's not 'free' revenue.
**********
State income taxes aren't the wonderful solution to everybody's budget problems,
contrary to what some may think. As studies have shown, state income taxes can be
detrimental to said states, and actually precipitate economic disaster. Unemployment can
go up, population can go down, and the state's economy can very easily suffer.
Instituting a state income tax will also require more government employees, increasing
the state's budget costs.
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