It’s conventional wisdom that individual income taxes are vital ways for governments to raise revenue. But as Chris Edwards points out in a Cato Institute blog post, nine of the 50 states don’t have an individual income tax. That’s enough of a sample for a simple comparison, and it allows us to see how state governments can manage without taxing individual income.
The nine states that don’t have an individual income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Edwards notes that Alaska and Wyoming are unusual because they have small populations and generate so much revenue from taxes on the energy industry. “That leaves seven states without individual income taxes that others may seek to emulate,” he writes. Those seven states are of varying sizes, spread out around the country, and have different political cultures, from red Tennessee to purple New Hampshire to blue Washington.
Is it the case that not having an individual income tax means only that all the other taxes are higher to compensate? Edwards writes that the states without an income tax do have higher property taxes and sales taxes, but the overall tax burden remains lower. The total tax burden is 8.1 percent of personal income in the seven states, compared to 9.6 percent in the states with income taxes.
Edwards makes some specific comparisons between New York and Florida that are illuminating. “New York has the highest state‐local tax burden in the nation at 13.9 percent, which is almost twice Florida’s burden of 7.2 percent,” he writes. Also, “New York’s bureaucracy is 34 percent larger than Florida’s, even though Florida has more residents.” In a sort of perverse way, New Yorkers are getting what they pay for.
Proposals to completely abolish a tax are commonly considered foolish or irresponsible, but it’s clear from experience that not having a state income tax is entirely manageable, and it may even contribute to smaller government overall. As Russ Latino wrote for Capital Matters earlier this year, Mississippi has been a leader on state tax reform, and politicians there are considering full repeal of the income tax as a next step. State leaders across the country should be encouraged by the examples of the seven states that Edwards highlights, and eliminating the individual income tax should be on the table.