Nine states survive perfectly well with no state income tax at all. These include large states such as Texas and Florida, medium size states such as Tennessee and Washington, and smaller states, in terms of population, such as New Hampshire, Nevada, South Dakota, Wyoming, and Alaska.
Vince Haley, running for the state Senate this year in the 12th district in Richmond, says Virginia can and should be the 10th state to join that elite, no state income tax club. He is campaigning on a proposal to adopt a spending cap on the growth of Virginia state spending equal to the rate of growth of population plus inflation. That will generate a surplus of current state revenues over state spending each year, which he proposes to use to reduce state income tax rates every year, until Virginia state income tax rates reach zero.
I estimate based on previous calculations that will take about 10 years for the state’s income tax to be phased out entirely. During that time, Virginia state spending would continue to grow by about 3.5% every year under the spending cap. This is not a plan to slash and burn the state budget, and the services it finances. But the spending cap itself would be highly desirable to limit growth in runaway state spending.
Both experience and logic show that phasing out state income taxes would substantially boost economic growth in Virginia, creating good jobs with rising wages and incomes. Income taxes are the most economically destructive of all taxes. That is because income levies tax directly the reward for work, savings, investment, and entrepreneurship. With the reward reduced, the incentive for pursuing these economically productive activities is reduced. The result is less work, less saving, less investment, fewer new businesses, less business growth, less job creation, lower wages and income, and lower overall economic growth.
Higher marginal tax rates reduce these incentives more. Lower marginal tax rates reduce these incentives less. A marginal tax rate of zero, as with no income tax, maximizes these incentives, at least as far the burden of income taxes is concerned.
Experience and economic studies bear this out. The most recent work is the new book An Inquiry into the Nature and Causes of the Wealth of the States, by economists Art Laffer, Steve Moore, Rex A. Sinquefeld, and Travis M. Brown. This book adds further depth to the economic studies presented in the annual volume entitled Rich States, Poor States by Art Laffer, Steve Moore and Jonathon Williams, published by the American Legislative Exchange Council.
Economic growth is 50% faster in the nine states with no state income taxes than in the nine states with the highest income tax rates. Think of how much faster 50% more growth compounds year after year.
Job growth is twice as fast in the nine no income tax states than in the nine top income tax states. Wages and incomes grow by similarly faster magnitudes in the nine no income tax states compared to the nine top income tax rate states.
Indeed, economic growth over time, changing the magnitude of what is being taxed, has an even bigger impact over the years on tax revenues than tax rates. As a result, total state tax receipts in the 9 no income tax states still grew 30% faster in the no income tax states compared to the top tax rate states.
The IRS produces rich data showing that the American people vote with their feet, moving year after year steadily out of high tax rate states and their stagnant economies with no economic growth, job growth, income growth, or opportunity, and into the economically booming no income tax states, taking their incomes and wealth with them. This adds up every few years to millions of Americans moving from the 41 states with income taxes into the 9 states without income taxes, which only greatly exacerbates the above trends regarding economic growth, jobs, and income.
This in turn is having a dramatic difference in relative political power and clout among the states over time. Compare how the relative electoral votes of New York, Ohio and Michigan have changed over recent decades with Texas, Florida and Tennessee.
The latest published data shows the impact on the 11 states that have adopted a state income tax over the last 50 years. All 11 states grew more slowly than the rest of the country after adoption of the income tax, with their GDP falling as a percentage of national GDP. Michigan was the worst, with their GDP declining by 59% compared to the other 39 states.
But the effect on the others was not dissimilar. Laffer et al. illustrate further with Ohio, which adopted its state income tax in 1971:
“Today, Ohio in general and Cleveland specifically are hollowed-out, crushed shadows of their former selves. The only enterprises prospering are tax-exempt entities such as the Cleveland Clinic and Cleveland State University. In Youngstown, a city ordinance requiring abandoned houses to be torn down and grass planted where they once stood has transformed Youngstown from a thriving steel town into an abandoned farm.”
They also offer New Jersey as a similar story. In the 1960s, it was “one of the fastest growing states in the nation, and people were moving from everywhere into New Jersey.” But after adopting a state income tax in 1976, by 2009, “New Jersey had the fifth highest personal income tax rates, the third most progressive tax structure, and one of the highest corporate tax rates in the nation.”
Moreover, each and every one of the 11 states adopting an income tax suffered a decline in the proportion of its total tax revenue compared to the total of the other 39 states. Michigan, for example, saw a decline in relative revenues of 46%. Laffer et al. explain, “You can’t balance a budget on the backs of the unemployed or collect tax revenues from people who leave your state. Higher tax rates are a double-edged sword. You collect more, of course, per dollar of income, but you get less income.” What this means is that in these states all they got for paying state income taxes was a lower standard of living.
Laffer et al. add that in terms of population, every single one of these 11 states declined in proportion to the rest of the country. West Virginia declined by 50%, Pennsylvania by 38%, Michigan by 35%, Illinois by 34%. Among a ranking of all 50 states by population growth, “each of the 11 states is in the bottom half of the rankings, nine are in the worst 13 states, and three are the worst three states.”
Laffer et al. even developed measures of the resulting quality of public services in these 11 states that adopted state income taxes in the last 50 years. There was no pattern of improvement in education test scores, with many declining, some sharply. “If anything, those states that have adopted an income tax have performed more poorly,” the authors write. Seven of the 11 suffered declines in health and hospital personnel, with four suffering “huge drops.”
As for police protection, violent crime rates increased in 8 of the 11, with property crime rates increasing in 6 of the 11. In 8 of the 11, poverty rates increased relative to the nation as a whole, with 4 increasing sharply. “Whoever heard of a state being taxed into prosperity?” the authors write. “Now we know it’s the reverse.” As for highway rankings, 6 of the 11 states fell, while 5 improved.
The authors conclude, “It’s hard to see an improvement in public services from the imposition of an income tax from these data.” Indeed, with state spending still increasing every year under Haley’s proposed cap, there is no reason to expect any decline in state services. The rate of population plus inflation maintains real spending per person in the state.
What Haley recognizes is that reversing the income tax in Virginia with a careful phaseout slowly over time would have the opposite of the above negative effects in states that adopted income taxes. Economic growth would accelerate to nation leading levels, like Texas. Savings and investment would increasingly flow into the state from across America, creating a jobs boom. Wages would spurt up as demand for labor accelerated.
But this opportunity is not unique to Virginia. Other states across the country are increasingly getting the word, and beginning to slash tax rates, with affirmative plans for an ultimate, complete phase-out. Haley is just far sighted enough to want Virginia to get ahead of this curve.
Peter Ferrara served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush. He presently serves as a Senior Fellow for the Heartland Institute, and a Senior Policy Advisor to the National Tax Limitation Committee.
