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Cost of Government Day (COGD)
[2005] [2004] [2003] [2002] [2001]

Special Focus: Phase Out State Income Taxes

Nine states prosper without any state income tax at all.  These include the big states of Texas and Florida, as well as booming Tennessee, and Washington, Alaska, Nevada, New Hampshire, South Dakota, and Wyoming.  Economic studies show these states enjoy higher economic growth, and more rapidly growing wages and family incomes.

The other 41 states should follow their lead and phase out their state income taxes as well.  While replacing these taxes with no other tax would be preferable, political realities will not allow for such a move.  Short of that, part of the “lost” revenue could be made up by increasing state sales taxes by a couple of percentage points, ideally coupled with taxpayer protections preventing the tax shift from turning into an overall tax increase in the long run.  The rest could be made up by restraining the growth of state spending.

One workable option would be to reduce state income taxes by the percentage that could be financed by increasing state sales taxes by 2.5 percentage points.  State spending could be limited to grow no more than what could be financed by state revenue growth of no more than the increase in state income minus 1 percentage point. Alternatively, the limit could be the rate of growth of state population plus inflation.  When revenue grows by more than this limit, the excess would be used to reduce state income taxes further, until the state’s income taxes can be phased out completely.  This could be accomplished in each state in less than a decade.  The spending restraint could be continued after that point to reduce state sales taxes.

The reduction and eventual elimination of income taxes would cause state economies to boom, while reducing the burden of excessive government growth.  As discussed in the Interstate Migration section below, taxpayers are “voting with their feet” – and migrating over time into the states with no income taxes from the rest of the country, taking their productivity and the income they generate each year with them, which produces more in revenues for these no-income-tax states.

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