BALFOUR: State income taxes in peril

Governors eye abolition

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Governors Bobby Jindal of Louisiana, Dave Heineman of Nebraska and Sam Brownback of Kansas have all recently publicly stated their desire to eliminate their states’ income taxes. Now joining this movement is North Carolina, where last week Senate President Pro Tempore Phil Berger called for his state to pursue serious tax reform this session, possibly including a repeal of North Carolina’s income tax.

Legislative leaders publicly outlined a plan last week that would eliminate North Carolina’s personal and corporate income taxes and largely replace the revenue via an expansion of the state sales tax.

These announcements come on the heels of similar efforts last year in Missouri and Oklahoma to eliminate income taxes, as well.

All of this begs the question: Why is there a growing movement of states that want to eliminate taxes on income while transitioning to a more consumption-based tax structure?

Simple: because it works.

Research recently published by the John W. Pope Civitas Institute in Raleigh, N.C., shows that average annual growth rates for states without corporate income taxes were 0.7 percentage points higher per year between 1992 and 2001, and 1 percentage point higher between 2002 and 2011. Similarly, states without a personal income tax exceeded the growth of other states by almost identical rates during those time frames.

Some critics attempt to dismiss this evidence by claiming that no-income tax states, like Alaska, Texas and Wyoming, are merely the lucky beneficiaries of abundant oil reserves to fuel their economic growth. If you remove those states from the comparison cited above, however, the remaining no-income tax states still far outperform other states. This doesn’t explain the relatively lackluster economic performance of energy resource-rich states like West Virginia, New Mexico and Louisiana.

Another strong indicator of economic vitality among the states is domestic migration patterns. It should come as no surprise that people have been fleeing high income tax states in favor of the lowest income tax states. Ohio University economist Richard Vedder found in a 2002 study that during the 1990s and early 2000s, roughly 6,000 people per week on average moved into the 10 lowest tax states on net. Taxes may not explain all of those moves, but that sure doesn’t seem like a coincidence.

Why is domestic migration an important measure to consider when evaluating relative state economic strength? Because people typically don’t move to another state in the anticipation of making themselves worse off. Rather, they are drawn to better opportunities — and often to lower taxes.

As the national recession continues to drag on, more states appear to be seeing the writing on the wall: Federal taxes are likely to go up in the near future. The best way to combat the negative impact of federal tax hikes is for states to eliminate their income taxes, thereby establishing themselves as outposts of entrepreneurial investment and job growth.

If any of the states signaling their desire to eliminate income taxes were to successfully follow through on these desires, the move would be historic in nature. The only other state to eliminate an existing income tax is Alaska, and it did so in 1980 on the heels of opening the Trans-Alaska oil pipeline, which brought millions in royalty payments to the state.

If North Carolina, Louisiana, Kansas and Nebraska are successful in eliminating their state income taxes, they could provide the momentum for a nationwide trend.

What a trend it would be. The research shows that eliminating income taxes in favor of consumption-based taxes benefits everyone through more jobs, bigger paychecks and faster economic growth. That’s a recipe for success — and many state leaders are starting to realize that fact.

Brian Balfour is director of policy at the Civitas Institute in Raleigh, NC.

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