States Look to Eliminate Personal Income Taxes
Facing big budget shortfalls, many states are considering fundamentally changing their tax structure. Kansas, Missouri, and Oklahoma are currently attracting the most attention with proposals to eliminate or reduce their income taxes. Whichever state eliminates its income tax first will send a strong signal to other states, and more importantly job creators, that they are open for business.
Research consistently shows that income taxes have a negative effect on growth. As highlighted in ALEC’s Rich States, Poor States annual publication, states without an income tax consistently out-perform states with the highest income taxes. The following table shows how the nine states with no personal income tax (PIT) compare to the nine states with the highest PIT rates:
The Nine States with the Highest and Lowest Marginal Personal Income (PIT) Tax Rates, 1999-2009
|Category||Highest PIT (DE, ME, MD, VT, NJ, CA, HI, OR, NY)||No PIT (AK, FL, NV, NH, SD, TN, TX, WA, WY)|
|Gross State Product Growth||44.91%||61.23%|
|Total State Tax Receipt Growth||62.43%||123.66%|
Source data taken from Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index
In Kansas, Governor Sam Brownback and legislative leaders are supporting proposals to reduce income taxes and use spending control to eliminate the income tax over time. Next door in Missouri there is a voter initiative circulating that will likely be on the on the ballot this November. The proposal would eliminate the state’s income tax entirely and replace it with an enhanced consumption tax. Studies from the Show-Me Institute, a free market think tank based in Saint Louis, show that eliminating the income tax would have real impact for Missourians. In a 2009 case study, researchers found that replacing personal and corporate income taxes with a broad, revenue neutral 5.11 percent sales tax would cause the state economy to grow faster.
Meanwhile, Oklahoma has its hat in the ring to be the first to eliminate the personal income tax. The Oklahoma Council on Public Affairs (OCPA) recently released a policy paper that shows the negative effects income taxes have on growth, and provides a plan to eliminate the personal income tax over time without raising taxes. By eliminating tax credits, deductions, and exemptions, Oklahoma can bring its income tax down to 3 percent from 5.25 percent, with complete phase out by 2022. The plan has received significant attention in Oklahoma, and the legislature is considering a bill to phase out the income tax this session.
Regardless of whether it’s Kansas, Missouri, or Oklahoma that wins the race to eliminate the income tax first, the national debate is heating up.