Kill State Income Taxes?

The Wall Street Journal says that some states are considering abolishing their state income taxes.  The Journal likes the idea, of course.

Here are some interesting population facts from the recent Census Bureau population estimates covering the 2000-2006 period:

  • Since 2000, about two million people have moved from states with personal income taxes to states without personal income taxes, not counting Louisiana’s loss of population.

Ohio University economist Richard Vedder had observed this pattern in earlier data.  The actual figures are 1,993,291 moved out of states with personal income tax rates from 2000 through 2006, with 2,323,783 moving into states with no personal income tax.  (The difference between the two numbers constitutes migration out of Louisiana.)

I looked at state income tax rates on regular income and capital gains, and compared these tax rates to economic growth rates in my paper on Oregon’s capital gains tax.  I concluded that tax rates had a significant effect on economic growth; it’s a small effect in any one year, but it accumulates over time into a substantial effect.

Business Strategy Implications: If you are wondering where to locate a business that serves local residents, look first to states with low or no income tax.  Some states will buck the trend by growing rapidly despite a high tax, but your odds are better in a no-tax state.  If you’re wedded to your present location, start talking up tax reform to shift taxation from income to consumption.