Are State Income Taxes Out of Date?

State Income Taxes May Not Actually Benefit States in the Long Run

by Branford Lyles on June 5, 2011

Of all the states in America only nine have no income tax. They range from large in population, like Texas, to small, like New Hampshire, Wyoming and South Dakota. Conventional thinking would say that an income tax means states get more money, meaning they can better fund themselves and better stimulate growth within their borders. Many statistics seem to imply just the opposite.

Peter Ferrara, Director of Policy for the Carleson Center for Public Policy, argues otherwise. According to Ferrara, income taxes actually penalize citizens for working, saving and investing. By increasing the price for increased profits, Ferrara argues, “The result is less work, less saving, less investment, fewer new businesses, less business growth, less job creation, lower wages and income, and lower overall economic growth.”

An annual study published by the American Legislative Exchange Council (ALEC) indicates that between the years of 1998 and 2008, the nine states with no income tax experienced economic growth at a rate 50 percent greater than their counterparts at the opposite end of the income tax spectrum. Furthermore, Ferrara says that by imposing income taxes, those forced to pay the most, i.e., the wealthy, are more likely to take their money and move somewhere more financially friendly.

These results are backed up by case studies on states like Tennessee with no income tax and its income-taxing neighbor Missouri. Over ten years, Tennessee’s Gross State Product rose 27% more quickly than the Missouri’s, jobs were created faster and even state revenues in Tennessee outpaced its neighbor’s.

While this may fall on some ears like more conservative diatribes against taxes of any kind, some Democrats have begun to voice similar sentiments. In Louisiana, lawmakers in the state senate have finally begun debating a bill meant to repeal the state income tax.

Introduced by Sen. Rob Marionneaux, a Democrat, the bill was almost killed before ever reaching the floor by Sen. Jack Donahue, a Republican. When confronted with the opinion from Donahue that he had no real plan other than the will to cut out revenues, Marionneaux retorted to his conservative counterpart, “You want to give tax breaks to rich oil companies one at a time, but don’t give them to mom and dad back home.”

Whether or not Louisiana will retain its income tax remains to be seen. It is an interesting look into an issue, though, which is finding bipartisanship on both sides of the issue.

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