November 2012

Lessons from the No Income Tax States

by Amy K. Frantz

On the federal level, taxpayers are facing an increase in income tax rates if the Bush Tax Cuts are not renewed this fall. Here in Iowa, there have been discussions of tax reform, but with a divided State Legislature, little action has taken place.  As our country struggles to overcome the economic doldrums, what should states like Iowa and the U.S. government be doing to improve the likelihood of success?

A new study demonstrates that lower tax rates are important to economic growth. In Taxes Really Do Matter: Look at the States, Dr. Arthur Laffer and Stephen Moore have reviewed economic data from 1960 to the present, and have found “that in any 10-year period you look at, the no-income-tax states consistently outperform the equivalent number of the highest-income-tax states.”[1]

The nine states without an income tax – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming[2] – have experienced greater growth rates in population, gross state product, non-farm payroll employment, and state and local tax revenue than the nine states with the highest personal income tax rates – Oregon, Hawaii, New Jersey, California, New York, Vermont, Maryland, Maine, and Ohio.

Laffer and Moore highlight their findings using the most recent data available from the states with no income tax and the highest-income-tax rates:

For example, over the most recent 10-year period, 2001-10, the average of the nine states without income taxes…had 14% growth in population — versus 9% for all states and only 5.5% for the nine highest-income-tax states…. Job growth in the nine no-income-tax states was 5.5%, versus close to zero in the average state and -1.6% in the highest-tax states.  On balance, no-income-tax states have two and one-half times the population growth of the highest income tax states, and yes, the no-income-tax states even have higher tax revenue growth than the average of all states and the highest-income-tax states.[3]

Nov 2012 Chart

The no-income-tax states are gaining population from the states with the highest tax rates. Laffer and Moore used data from the Internal Revenue Service (IRS) and Census Bureau to look at those moving from one state to another.

By now it should come as no surprise that far more tax returns — 416,000 more — are from people moving to the no-income-tax states from the highest-income-tax states than people moving to the high-income-tax states from the no-income-tax states. Not only are there more tax returns moving from the highest to the no-income-tax states than the reverse, but the average adjusted gross income of those moving to the no-income-tax states is far higher than is the average adjusted gross income of those moving from the no-income-tax to the highest-income-tax states.  The data show clearly that Americans are packing up and moving into low-tax states and moving away from high-tax states and taking their incomes along with them.[4]

Laffer and Moore highlight two states to demonstrate this point – California, with a top income tax rate of 10.3%, and Texas, with no income tax.

Over the 10-year period from 2001 to 2010, Texas gained nearly 870,000 net migrants from other states while California lost over 1.5 million people to other states. Texas’ gains and California’s losses are nowhere more apparent than in the Census results for the 2010 congressional reapportionment:  Texas increased its congressional delegation by four seats, and California did not gain one single seat.  Yet, the politicians in Sacramento are currently sponsoring a ballot initiative to be voted on this fall that would, retroactive to January 1, 2012, increase the top tax rate from more than 10% to more than 13% — the highest in the nation.[5]

California has apparently not yet learned the lesson that high tax rates are driving away that state’s residents and impacting economic growth, while the no income tax states are experiencing greater growth in population, economic growth, and even tax revenue. Will other states, including Iowa, get the message?

Amy K. Frantz is Research Vice-President at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Arthur B. Laffer, Ph.D. & Stephen Moore, Taxes Really Do Matter: Look at the States, The Laffer Center for Supply-Side Economics, September 2012, p. 3, <http://www.laffercenter.com/2012/09/taxes-matter-states/> accessed October 26, 2012.

[2] New Hampshire and Tennessee tax only dividend and interest income.

[3] Laffer & Moore.

[4] Ibid, p. 11.

[5] Ibid, p. 4.