Ready to Ditch the Income Tax

More states are looking at eliminating their income tax entirely.

U.S. News & World Report

Ready to Ditch the Income Tax

Closeup of a tax bill

(iStockPhoto)

The idea of abolishing the federal income tax, and the Internal Revenue Service along with it, is growing in popularity. As a practical political proposal, it is still a long way from coming to fruition.

Not so in the states – where more and more politicians are looking to cut or eliminate outright the tax on personal income which, as economists know, is the most destructive tax there is because of its impact on savings, investment and economic growth.

“No one says it will be easy but phasing out and ultimately abolishing the state income tax here in Virginia would not be as hard as some people make it out to be,” says Vince Haley, an attorney and longtime policy aide to Newt Gingrich, who is a candidate for state senate in a heavily Republican seat just outside Richmond. “The most important step is to be more responsible with spending. You don’t have to enact any spending cuts; you just have to make sure you control the growth in spending. If we can control spending, we can apply the resulting budget surpluses to lowering income tax rates over time until we reach zero."

Haley intends to make phasing out the Virginia’s income tax – currently split among four brackets, with a maximum marginal income tax of 5.75 percent – a central issue in his campaign in Virginia’s 12th Senate district. By doing so he’s part of a new generation of GOP leaders advocating a thoughtful and different approaching to the responsibilities of governing.

"We're beginning to see states develop a smart approach to abolishing the state income tax,” says Will Upton, who follows state tax policy for Americans for Tax Reform, the group famous for asking candidates for office to sign a pledge to oppose efforts to increase taxes. “Using revenue triggers to ratchet down rates based on economic growth is the way many states are looking to move forward. Already Kansas has enacted the triggers. North Carolina has enacted a similar trigger. Paul LePage in Maine is looking to revenue triggers as a potential means to take Maine to zero. If states can control spending and maintain growth, more than just nine states may have no income tax here very soon," Upton says.

“Non-income tax states are where businesses are being created and where Americans want to live. It only stands to reason that we should have more of them,” says Phil Kerpen, president of the non-profit group American Commitment.

There’s plenty of evidence to show that Kerpen is correct, that the nine states that have no income tax have economies that are performing as well or better than those that tax personal income.

The non-income tax states include Florida, which has one of the strongest and fastest local economies in the nation despite the anemic national environment, and Texas, which is leading the country in job and wealth creation. People are moving there in high numbers, relocating from high-tax, high-regulation environments in places like New York, Illinois and California, all of which are floundering badly.

It’s a simple proposition, but one that has to be executed over time. As revived economies begin to grow once again, bringing more money into state treasuries, the opportunity to sketch out a certain plan to return money to the taxpayers can be taken up.

This doesn’t mean things will always go smoothly, that the transition will be seamless. Kansas, which is scheduled to abolish its state income tax sometime in the next few years, is experiencing a temporary revenue shortfall thanks in part to bad revenue estimates by state economists. There may have to be some temporary revenue enhancements to get them over the hump, but it is nonetheless significant that the voters there chose to re-elect Republican Gov. Sam Brownback – who pushed the abolition of the state income tax through the legislature – in November 2014 rather than go with Democrat Paul Davis, who made his opposition to repeal a central theme of his campaign.

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All across the country, governors from Louisiana to Georgia and from South Carolina to Idaho, are at least taking a look at the idea. It’s one of those issues upon which Republicans and Democrats differ, and in an important way. The GOP wants to grow the private economy while those who back President Barack Obama seem bent on making the public sector grow, even at the expense of private jobs and personal choice.

“Ultimately it’s about going to the voters and saying ‘Do you want more money in your pocket at the end of the day? Do you want politicians to control their spending so you don’t have to fill out income tax forms every year and Virginia can grow its economy and produce more jobs?' Virginia was the 10th state to ratify the Constitution. I think we should be the 10th state without an income tax. It’s a winning formula, economically and politically,” Haley says.

He may be right. All the available evidence suggests this is the case, which is why more and more politicians are willing to at least discuss the idea.