Thinking Outside the Box?
Studies in Fiscal Federalism and State–local Finance series
Edited by Sally Wallace
Chapter 4: Going Without an Income Tax: How do States do it?
David L. Sjoquist1 INTRODUCTION There are seven states that do not impose a state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, New Hampshire and Tennessee have very limited personal income taxes, taxing only interest and dividend income. For purposes of this chapter, I consider these nine states ‘no-income tax’ states. A question that arises is: how do these states finance government in the absence of an income tax? At one level the answer to the question of how these states are able to get along without an income tax is simple: these states must either spend less or rely more heavily on other revenue sources. But in this chapter I attempt to explore this question in a bit more depth. Income taxes are an important source of revenue to the other 41 states. For example, in fiscal year 2008 (FY2008), income tax revenue (personal and corporate) is expected to account for 48.9 percent of Georgia’s state revenue. In FY2007, for all 50 states, income tax revenue was 42.6 percent of total tax revenue. Given the relative importance of income taxes, it would appear to be a challenge for a state to go without an income tax. Yet, occasionally, proposals are made to eliminate state income taxes. For example, in 2007 and 2008, suggestions have been made that Georgia should eliminate its income tax. So, a related question is: how would a state finance government in the absence of an income tax? One approach to...
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