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Abolish
State Income Taxes
By Richard Rahn |
Did you know there are nine
states that have no state income tax?
The non-income-tax states (see accompanying
chart) are geographically and economically diverse, ranging from the state of
Washington in the Pacific Northwest, to Texas and Florida in the South, and up
to New Hampshire in the Northeast.
Why is it that some of the states with the
biggest fiscal problems have the highest individual state income tax rates,
such as New York and California, while some of the states with the least fiscal
problems have no state income tax at all?
High-tax advocates will argue that the high-tax
states provide much more and better state services, but the empirical evidence
does not support the assertion.
On average, schools, health and safety, roads,
etc. are no better in states with income taxes than those without income taxes.
More importantly, the evidence is very strong that people are moving from
high-tax states to lower-tax-rate states — the migration from California
to Texas and from New York to Florida being prime examples. (Next year, the
combined federal, state, and local income tax rate for a citizen of New York
City will be well over 50 percent, as contrasted with approximately 38 percent
for citizens of Texas and Florida.)
If the citizens of California and New York
really thought they were getting their money's worth for all of the extra state
taxation, they would not be moving to low-tax states.
The obvious question then is, Where is all the
extra money from these state income taxes going?
It is going primarily to service debt, and to
pay for inflated salaries and employee benefits. It is interesting that the
high-tax-rate states also, on average, have much higher per capita debt levels
than states without income taxes. (Alaska is an outlier because it has its oil
reserve to borrow against and actually gives its citizens a
"dividend" each year.)
The biggest additional burden the high-tax
states have is unionized government worker contracts. My Cato colleague Chris
Edwards notes: "Half of all state and local spending $1.1 trillion out of
$2.2 trillion in 2008 goes toward employee wages and benefits."
His study showed that, on average, total hourly
compensation for state and local government workers was 45 percent higher than
for equivalent private-sector workers.
In addition, the government workers are rarely
fired even those with poor job performance. Importantly, the differential was
much greater in states where more than half of the state employees were
unionized, and these were all in states with state income taxes, with the
exception of Washington.
High rates of unionization of public employees
and high rates of debt go hand in hand. Those states whose government workers
are less than 40 percent unionized have median per capita state debt of $2,238,
while those states where unionization rates are over 60 percent have a median
per capita state debt of $6,380.
High rates of unionization tend to lead to
excess staffing, unaffordable benefits, and pensions.
There have been a number of both empirical and
theoretical studies showing the negative impacts of state income taxes and
particularly those with high marginal rates on economic growth within the
state.
A recent study published in the Cato Journal by
professors Barry W. Poulson and Jules Gordon Kaplan, which was carefully
controlled for the effects of regressivity, convergence, and regional
influences in isolating the effect of taxes on economic growth in the states
concluded: "Jurisdictions that imposed an income tax to generate a given
level of revenue experienced lower rates of economic growth relative to
jurisdictions that relied on alternative taxes to generate the same
revenue."
State Income Tax Rates and Debt (All Figures
Percent)
| States |
Income Tax |
State Debt as % of Income |
| Without Individual Income Tax |
| Tennessee |
0 |
2.02 |
| Texas |
0 |
2.70 |
| Nevada |
0 |
4.07 |
| Wyoming |
0 |
4.90 |
| Florida |
0 |
5.20 |
| Washington |
0 |
7.93 |
| South Dakota |
0 |
10.95 |
| New Hampshire |
0 |
14.10 |
| Alaska |
0 |
24.01 |
| Highest Individual Income Tax rates |
| Iowa |
9.28 |
6.47 |
| Maryland |
9.23 |
7.26 |
| California |
10.55 |
7.55 |
| Oregon |
11.36 |
8.61 |
| Hawaii |
11.00 |
11.89 |
| New Jersey |
9.06 |
12.01 |
| New York |
10.67 |
12.22 |
| Vermont |
8.95 |
13.12 |
| Rhode Island |
9.9 |
20.04 |
The state of New York is a poster child for what
not to do. At one time, it was the richest and most populous state. But at
least going back to the Harriman and Rockefeller administrations decades ago,
it decided it could tax and spend its way to prosperity. (Note: New York City
residents face a maximum combined state and city income tax of over 12 percent,
while those in many New York counties pay a little less than 9 percent, giving
the state an average maximum tax rate of almost 11 percent.)
The results have been the opposite of what was
promised.
New York's relative population, economic growth,
and per capita income have all declined, particularly in relation to those
states without a state income tax.
In the past year, per-person taxes have
increased by $419 in New York, far higher than any other state. (Note: They
went up only $1 in Texas. Is New York or Texas now better off?)
Income taxes, as contrasted with consumption
(i.e., sales) taxes and modest property tax rates, are far more costly to
administer and do far more economic damage (by discouraging work, saving and
investment) and are far more intrusive on individual liberty.
The states without state income taxes overall
have had far better economic performance for most of the past several decades
than have the income tax states — particularly those with high marginal
taxes.
The Tea Party movement indicates that it might
be the right time politically for politicians in the income tax states to call
for those taxes to be phased out.
Good economic s might actually be good politics
this year.
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