Across the Nation

Measuring Income Taxes by State: The King Kong and Flea Comparison

By  | 

Unlike the more flexible taxation standards of the federal government, individual states lack options when it comes to raising money. To make up for the difference, states rely on two primary forms of taxation: income tax (both personal and business) and sales tax. When it comes to analyzing income taxes by state, their resulting effect on a state’s economy, infrastructure, and population is an ongoing conversation.

The Stark Differences Among the States

When examining your current paycheck, or looking into an out-of-state job, it is pivotal to understand the differences in how state governments tax their residents. According to the Tax Foundation, there are seven states without a state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In addition, Tennessee and New Hampshire only tax dividend and interest income.

On the other end of the spectrum, states such as California (13.3 percent), Hawaii (11 percent), Oregon (9.9 percent), and Minnesota (9.85 percent) have some of the highest marginal income tax rates in the country. With this additional money coming into the local government, you may think the quality of life, infrastructure, and education system in these states are among the best in the country. That is not always the case.

The Have and Have-Not Comparisons

States without this incoming flow of capital generally get along with lower per capita revenues. While some might think that means that low-tax states offer fewer services or perform worse economically, an article from the Cato Institute noted, “The states without state income taxes overall have had far better economic performance for most of the past several decades than have the income tax states — particularly those with high marginal taxes.”

The article goes on to state that income taxes “are far more intrusive on individual liberty.” As a costly tax to administer, income taxes can actually do more harm than good by discouraging local businesses and dissuading personal investments.

In a 2012 Wall Street Journal column, economists Arthur Laffer and Stephen Moore said that comparing the economic performance of states with no income tax to states with high rates is “like comparing Hong Kong with Greece or King Kong with fleas.” They noted that non-taxing states had a higher output growth and job growth in the past 40 years. Of the nine highest income-taxing states, seven had no net job growth at all.

Residents Are on the Move

Evidence also suggests that residents of high-tax states are “voting with their feet” by moving to low-tax jurisdictions. According to Laffer and Moore, “Over the past decade, states without an income tax have seen 58 percent higher population growth than the national average, and more than double the growth of states with the highest income tax rates.” It’s only natural for people to want to keep as much of their income as possible, so states like Florida and Texas start to look ideal for reasons beyond the weather.

As the great debate over income taxes continues, leaders in several states, including Georgia, Kansas, Missouri, Oklahoma, and Maine, have been discussing abolishing state income taxes in an effort to draw in more businesses and curb the great outward migration.

Income tax is as much of an individual issue as it is for your community. You know how much you paid for gas the last time you filled up your car. You may even know how much you paid in sales tax on your last purchase. But few tend to think about income taxes by state. How much is being taken out of your paycheck every month based only on where you live? Furthermore, do you know where that money is going?