No Income Tax States – a Success or a Failure

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In recent years, much debate has been stirred regarding states with no income tax and whether the benefits outweigh the income tax system already in place. The American Legislative Exchange Council reported that, as of 2018, states with no income tax have outperformed those that have it. This can be seen primarily in job creation and population growth. Michael Mazerov of The Center of Budget and Policy Priorities explained that in his research he has found no compelling evidence that states without income tax are outperforming those with a tax. He correlates that a major contributor might instead have to do with family reasons and job opportunities within specific fields. With many contradicting viewpoints on the subject of states with no income tax, this paper will try to explain why something that sounds so beneficial can subtlety relocate these taxes in to other state taxes. Benjamin Franklin once stated that in this world, nothing can be said to be certain, except death and taxes. In American history, taxes have always been a point of frustration for many. A major pre-Revolutionary war quote no taxation without representation expresses the angst of the colonists' attitude toward unfair taxes. From the time the Constitution was enacted till 1840 there would be no state income tax applied.

Starting in 1840 many states, mostly southern, would begin to apply state income taxes, some taxing all income and others only taxing partial income. These taxes were brought on by Jacksonian Democracy and the Panic of 1837. During the American Civil War and the Reconstruction Era, the country would see a rise in income taxes in many states in both the United States of America and the Confederate States of America. Many states would continue to add and abolish these taxes until the Great Depression struck in 1929. During this time, a third of the states would have enacted a state income tax. After World War II ended, states would continue to slowly add state income taxes with South Dakota and West Virginia being the only two states to have it abolished. Recently, several states have contemplated getting rid of state income taxes due to the recent recession in the late 2000's. Currently there are nine states with no income tax: Alaska, Florida, Nevada, Tennessee, Texas, Washington, Wyoming, South Dakota and New Hampshire. One major question that many have about no income tax states is: how do these states get enough money to run their governments without collecting an income tax? The answer is different and slightly confusing for each state.

Many states look at the revenue that can be brought in with taxes and whether each tax is viable enough to support applying it. Wyoming is a great example. With its population being just over half a million, an income tax would make a very unlikely option to supply enough money to run a state government. Instead of a state income tax, Wyoming relies heavily on severance taxes and mineral royalty taxes due to its abundance of natural resources within the state.With a small population and a lot of open land, the state of Wyoming does not have to concentrate its government resources on highways and hospitals making not having state income taxes a more viable option for the people of the state. Another great example is Nevada with its major money-making contributions coming from sales taxes and gaming taxes. With it being a major tourist destination because of the many casinos and gambling opportunities, Nevada's lawmakers know that having a state income tax would not be as viable an option. Also, without a state income tax, many who may want to be in the gambling industry or who are fans of gambling would be more likely to relocate to a state with no income tax and little restriction on making money from gambling. These two examples show that no two states are alike. Each state has a different population, different resources and different sources of income.

It is up to each individual state to know what type of revenue it best generates and apply the proper taxes associated with those revenues. There are two specifics exceptions to the typical states with no income tax which will now be presented. The first example is Florida. Having the advantage of fair year-round weather, it has had a major influx of retirees flocking to the state. One major reason for this influx is that Florida is not taking out any state tax on retirement income. For many retirees and elderly residents, this is important to ensure that their later years of life will be spent on more than just paying taxes. Florida's Constitution prohibits the collection of any sort of state income tax and, with that being said, residents can rest assured that there will be no change to this in the near future. On the other hand, one thing that is a positive about living in Florida amid its beautiful weather can also become a negative: homeowners' insurance. Due to the constant threat of hurricanes in Florida, it has the highest home insurance cost in the country. This high home insurance expense is a major reason why Florida's state government can afford to not have a state income tax. Even with the expensive cost of home insurance, people like professional golfer Tiger Woods still find it profitable to live in Florida. In the year 2010, fellow professional golfer Phil Mickelson expressed his dissatisfaction with California's state income tax. He stated that the state of California took out 60% of his income in taxes.

Golfer Tiger Woods showed rare sympathy explaining that this is the reason he moved from California to Florida when he turned professional. To get a better understanding of his complaints, one should look at taxes enforced in Mickelson's home of Rancho Santa Fe, California and Wood's home in Palm Beach, Florida. As of 2017, not only does Mikelson pay a 13.3% income tax as opposed to Tiger's 0% income tax, but he also pays more in sales and property taxes. Though looked at as an elitist, Mickelson does have a point when it comes to some of the advantages of moving to a no income tax state. What he should consider is paying the highest homeowners' insurance rate in the country on what I imagine will be a fairly large and expensive mansion might equal what he will not have to pay in state income taxes. Other no income tax states have to use other means of persuasion to lure people to move to their states. One that might have the hardest time is the cold, harsh climate of the state of Alaska. With it having typically extreme cold weather, Alaska had to be creative about ways to get people to populate its state. A major revenue source for Alaska is its oil pipelines making it possible for its state government to not depend on a state income tax.

Due to the success of their oil pipelines, a Permanent Dividend Fund makes it possible for Alaskan citizens to earn a check from the state for around 700 to 1,000 dollars depending on the price of oil for that specific year. These factors alone make Alaska one of the most no income tax friendly states to live in within the United States. With the success of Alaska's oil pipelines, the state has attracted many workers. It has also seen a slight influx from the retirement community. With the ability to not have their retirement income and social security touched they also have the ability, depending on their age, to have state municipal taxes taken off for the first 150,000 dollars of the assessed value of their home. Even with all of these positives, Alaska still finds it difficult to get people to move to its tax friendly state. For retirees, the constant cold and limited access to medical care makes it a risky endeavor to move there. Also, Alaska puts a high tax on vehicle rentals at ten percent and recreational vehicles at three percent. Local levied taxes are applied between 1 and 7 percent on raw fish, hotel and motel stays, severance, liquor and tobacco, gambling, tire and fuel transfers.

With all of these additional taxes, it is apparent that even with the advantages of no income taxes, one will always find those taxes reproportioned in other taxes that are essential to cover a state's daily living expenses. Along with Alaska's climate, all of these extra taxes imposed will more than likely affect the residents on a daily basis. Like Wyoming, South Dakota has a similar sprawling landscape. Also, like all the other states with no income tax, it funnels what would be collected from those to other taxes. South Dakota primarily relies on a high sales tax revenue. As of 2010, its general sales tax accounts for 56.9 percent of the state's revenue.To add to the high sales tax, residents of South Dakota can also plan on paying higher property taxes that are slightly above the national average. Another state that relies heavily on high sales and property taxes is Tennessee. It also leads the country with the highest combined sales and local tax rate. Tennessee's sales tax alone is the highest in the country at seven percent. When combined with the local sales tax, it can rise to 9.45 percent. To put this into perspective, 9.45 percent is more than double the combined rate in the super touristy state of Hawaii. What many forget when thinking about a state's sales tax is that anytime you go out to eat, the sales tax is added to your food order.

This taxation makes it even harder for the general population because many who have the lowest income are the ones who suffer the most due to the fact that food is an essential to being able to survive. If people who make less have to spend more on essentials that means that they are in danger of not being able to eat what the average person needs to survive. Another tricky thing with a no income tax state like Tennessee is that the cities along the state borders have companies that employ many residents from Georgia. This leads to a whole new set of problems for individuals who live in a no tax state and must compete for jobs. Chattanooga, Tennessee is a city that borders Georgia. With it being so close, many Georgia residents work in Chattanooga. What many people don't realize about working in a no tax state is that you still have to pay an income tax for your state. When you or your company do not take out that tax, you are left with a hefty payment at the end of the year depending on how much you have made within that year. Another complication could be with owning a home in more than one state. This could leave someone paying income taxes for both states which for most would be hard financially. Many get around this by listing the state with the lowest income rate as your primary place of residence. These rules can be a little different for individuals who are in the military. Serving in the military, you may live in many states and countries within any given year. This can also mean living on a military base for a duration of the year.

This can obviously be very confusing, so the government makes those who are in the military pay taxes to the state they lived in when they first enlisted. For some, this can be a great benefit due to some states not taxing military pay. Many studies have shown that no income tax states are growing at a faster rate than states with an income tax. From 2008 to 2013, Texas gained one million jobs while California last jobs. () The Bureau of Labor Statistics survey on employment found that the exact number was 1.8 million for Texas with California losing five thousand jobs. () Over that same period, it was found that New York lost over two hundred thousand jobs while Florida gained twenty-nine thousand. () Other experts disregard these numbers by stating that it is simply a coincidence because of the climate, cheaper housing and higher wages for some residents. () It is also important to point out that one of the most successful places in any state is Silicon Valley. Not only is it thriving but it is a huge contributor to California's economy at the moment.

This is happening while low tax states like Alaska are currently doing poorly. It is obvious that this job growth would be a huge incentive for states to continue to work on getting more and more businesses to their states with tax advantages. Not only have some states started working on trying to get little to no taxes for businesses but they also know that if businesses are brought in then more people will flock to your state for work. When this happens, you have more qualified workers to choose from that makes communities more economically viable and thriving. A perfect example of this is can be seen in the city of St. Elmo, Tennessee. Fifteen years ago, this was a community that was showing the effects of aging along with the houses and community. After businesses started coming to the area, you saw a rise in young professionals buying houses and fixing them up. After a short time, this led to an initiative to utilize the obvious touristy downtown. Now the area of St. Elmo is very prominent and growing at a rapid rate. As far as the economy is concerned, sometimes it can be like playing the lottery. Depending on the economic state of the entire country, political parties that are currently in control or wars that may be currently active around the world, it is always hard to tell what might happen to a state's specific economy. States that usually thrive, like Alaska, can see oil prices plunge across the country causing a huge deficit in their state budget.

Recently Alaska had a $3.8 billion state budget deficit that made them reconsider their state income tax and sales tax. This should always be in the back of one's mind when considering moving to a state that may look like a homerun but might eventually turn into a strikeout as the economy fluctuates. Nevada is another state that could see a major change in economic value due to sports betting now being allowed in many other states recently. A state that prided itself on being the only state where one could bet on sports and have casinos now has to compete with new states that might have more tourist value. Unless Nevada can up their tourism and offer more than these other states, it may soon see itself considering a state income tax or some other tax to make up for what may be lost by this recent turn of events. In conclusion, no income tax states do have some benefits compared to those states with income taxes. The problem is that many of these benefits are hiding the real taxes that are made higher due to cutting out income taxes. For many states such as Wyoming and Nevada that have other ways of funding their state governments, it makes more sense. However, in states like Tennessee it seems like a sneaky way to put taxes where they do not need to be.

Tennessee is a touristy state with Nashville and Gatlinburg, but to have its sales tax almost double that of Hawaii is hard to fathom. A group of individuals who benefit the most from having no state income taxes are retirees and some military professionals who were living in a no income tax state when they enlisted. People who seem to benefit the least are those with lower incomes. In states like Tennessee where the sales tax is so high, many who need every cent to count will find their grocery bills rising with every piece of food taxed. As history has taught us, taxes will be something that will always be a part of our lives in America to make our state and local governments run. What people need to be aware of when moving to a state specifically for tax purpses is to really research whether no income tax states are really a benefit and not just a way to reproportion taxes elsewhere.

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No Income Tax States - a Success or a Failure. (2019, Mar 18). Retrieved February 29, 2024 , from

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