WV Center on Budget and Policy > Blog > Tax and Budget > No Income Tax Doesn’t = Low Taxes

No Income Tax Doesn’t = Low Taxes

There has been a lot of noise lately in the policy community about a new report out of Oklahoma, recommending the elimination of the personal income tax. The report claims that the nine states with no personal income tax have performed better economically than the nine states with the highest personal income taxes.

The Institute on Taxation and Economic policy debunks the report, showing that the no tax states actually are not outperforming the the high tax states. While the ITEP report addresses some of the flaws in the Oklahoma report, I’m taking a different approach.
 
The Oklahoma report compares the nine states with no personal income tax with the nine states with the highest marginal personal income tax rate. The report also compares the states with the lowest overall tax burden with the states with the highest overall tax burden. However, these two comparisons are not the same.
 
For example, the state of Washington is one of the no income tax states. However, according to ITEP, its overall state and local tax burden on middle class income is 11.2%, which is a higher overall rate than 7 of the 9 “no income tax” states. Why? What state’s like Washington lack in income taxes, they make up for in property and sales taxes. 
 
By focusing on the income tax, the report misses out on these other local taxes we all pay. And while the report does attempt to show that overall tax burden matters, the report advocates the elimination of the income tax, despite the fact that states with no income taxes don’t necessarily have lower tax burdens. And I definitely don’t think the conclusion the authors wanted us to take away from the report is that high property and sales taxes lead to economic growth.
 
The same problem applies to business taxes in the “no income tax” states. Despite little to no evidence, there is a steady drumbeat that business taxes are all that matter for economic growth. So I doubt that many would advocate replacing the personal income tax with higher business taxes, but that is exactly the conclusion one could come away with from the Oklahoma report. According to numbers from the Council on State Taxation, the “no income tax” states tend to have higher business taxes than the “high” tax states, as the table below shows.
 

“High” Income Tax

No Income Tax

State

Business

Tax Rate

State

Business

Tax Rate

Maine

7.6%

Alaska

11.6%

Vermont

6.8%

Wyoming

9.3%

New York

6.4%

Washington

5.8%

Hawaii

5.4%

South Dakota

5.5%

New Jersey

4.9%

New Hampshire

5.4%

California

4.7%

Texas

5.0%

Ohio

4.5%

Florida

4.9%

Maryland

4.2%

Nevada

4.9%

Oregon

3.8%

Tennessee

4.6% 

 
Both Alaska and Wyoming have higher business taxes than any of the “high” income tax states, while 4 of the “high” income tax states have lower taxes than any of the no income tax states. But again, I strongly doubt the authors of the Oklahoma report want us to conclude that high business tax states have stronger economic growth.
 
So what should be the takeaway? All of the tax burden and tax climate studies end up contradicting each other (see West Virginia’s property tax climate ranking versus the rhetoric around the cracker tax incentive), because they all have to leave out major factors to make their point. Because the factors that do matter to economic growth –  infrastructure, markets, workforce, public services, etc –  have no obvious relationship to low taxes. 

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