After Hours: Eliminating State Income Taxes (From the Archives)

Added: 2026-05-22

[00:00:02][music] >> Hi everybody, Sharyl Attkisson here.

[00:00:07]Welcome to another edition of Full Measure After Hours. Today, eliminating state income taxes. More states are cutting [music] and even considering eliminating state income taxes. It's a popular idea, but is it feasible?

[00:00:22]If you talk about cutting or eliminating [music] state income taxes in places where they have a state income tax, well, that's pretty popular among most people. It promises, say advocates, bigger paychecks, booming businesses, and it can be a magnet for population growth.

[00:00:39]Proponents also say it's a growth engine that is taking a big part in reshaping America's map.

[00:00:46]But is it feasible?

[00:00:48]Sunday, December 14th on my TV show Full Measure, I'll be reporting from Arizona, which reports some pretty remarkable results since changing its taxing strategy.

[00:00:58]The state enacted a flat tax in 2021.

[00:01:02]I've heard a lot of misunderstanding over the years as to what a flat tax is.

[00:01:06]It is not a sales tax. A flat tax means everybody's charged, everybody who pays taxes that is, the same percentage. So, whether you're rich or middle income, let's say the tax is 5%, everybody pays 5%. That's not how it is at the federal level or in many states. The way it works at the federal level, wealthier people not only pay more, naturally because a percentage of their greater income, let's say we're talking 5%, 5% of a wealthier person's income is a lot more money than 5% of a lower income person's money. So, wealthier people are already paying more money if everybody pays 5%. That's a flat tax, but under our progressive tax system, most places, including at the federal level, wealthier people not only pay more as they would under a flat tax, but exponentially more because their percentages go higher.

[00:02:05]Arizona enacted its flat tax in 2021. It once had a progressive taxing system.

[00:02:11]The more you made, the greater percentage of your income you had to pay, but starting a few years back, they collapsed their five different brackets, their five different percentages into four, and then down to one, which ended up being below the lowest rate that they had originally, 2 and 1/2%. This was phased in over a couple of years. It amounted to a huge tax cut for almost everybody, and now Arizona has the lowest flat tax of any state in the country.

[00:02:43]But some states, as you'll hear in today's podcast, like Florida, they have no state income tax at all.

[00:02:50]We'll be talking about this and trends in other states with Jared Walczak. He's with the Tax Foundation, a nonprofit that backs a simple, transparent tax code.

[00:03:02]>> [music] >> Can you give a general overview of the landscape when it comes to states that do or don't have income taxes?

[00:03:14]Yeah, so we have nine states that don't have a wage income tax. One of them has a tax just on capital gains. That's Washington, but nine states don't have one. Eight of those never did. Only one has ever eliminated it, and that's Alaska. Uh some of these states have really focused on this as a source of a competitive advantage for them. You think of obviously Texas, Florida, to some extent Tennessee, and others that they've just really made this their image, their source of attraction. And you have other states now that want to join them, either to be a very low income tax state, or even to eliminate income taxes altogether. You can't necessarily entirely recreate Florida, but you can do something to make your tax environment more competitive and more attractive for the sort of people who do migrate on tax decisions or who follow the jobs and go to places where there's more likely to be more employment. In the last couple of years, has this movement or idea picked up or has it been something that's always been long discussed in a lot of states?

[00:04:10]You know, economists have long talked about the competitive advantage of focusing less on income taxation and more on consumption taxes and other taxes just because of the economic distortions each tax makes that income taxes do more to hurt economic growth than other taxes. And policy makers have long understood that, but you didn't see the massive changes that we've seen in recent years. Really, the pandemic seems to have been a tipping point where a lot of states were flush with cash. They had an opportunity to make reforms and they were asking, "Where do we want to do that?" And particularly in era where they expected there could be more migration, that people had more flexibility and mobility, they said, "We want to cut income taxes." Maybe that's eliminate them, but in most cases it's just can we make them competitive? And we saw 28 states cut the rate of their income tax since 2021. That's huge.

[00:05:00]Um what about COVID made states awash in cash? Was it the federal funding that they were getting?

[00:05:06]There's a variety of things. We had a very long period of economic growth.

[00:05:09]We're still in that for the most part.

[00:05:11]We had a number of changes at the federal level and in the courts that also changed what revenue states can receive. So, we had the Wayfair decision that broadened the ability for states to collect remote sales tax collections. We had the Tax Cuts and Jobs Act, which was a significant tax cut at the federal level, but it broadened the base and lowered the rates. And the net of that at the federal level was a tax cut. But for the states, it was just a substantially broader base that flowed through to them. And if they didn't cut rates, they were essentially allowing a significant net tax cut. So, a lot of states were already primed to cut their rates, but then during the pandemic, you did have some of the temporary relief, which is mostly gone now and you can't base on that. But states just continue to see the revenue flow through and a lot of states were looking at ways to return some of that to the taxpayer. You said states see this as a potential competitive advantage. Is that true?

[00:06:03]It is, yes. Obviously, not everyone is going to go where there are the lowest taxes. People care about a lot of things. They want a certain quality of life. They want a cost of living that works for them. They want amenities and people are going to have different mixes of amenities and things they want in their community. So, you're not going to see everyone move to Wyoming because it has no income tax. But on the margin, it makes a difference. People, especially those who are more mobile, do want to go to lower tax states in many cases. And maybe even more importantly, people go where the jobs are. And job creators are more likely to create and expand in the states that have lower taxes, particularly lower income taxes. So, there might be people who wouldn't tell you they move for taxes. They'd say they move for a job, but indirectly, they move for taxes. What's the argument against eliminating the income tax at the state level?

[00:06:53]A lot of it is about your capacity to raise revenue from other sources and the the mix that you have without it. I like to tell policymakers that they're on the right track if they're trying to reduce their income taxes. They have the right idea that income taxes are less competitive, but what you replace it with is really important. That cutting the income tax is an instrumental goal towards a true aim of greater economic competitiveness, more growth, more opportunity. If you are just so set on eliminating the income tax that you will choose any replacement source of revenue, no matter what it is, or you will cut to the bone in ways that are going to hurt your economy or make your state less attractive, that's not bringing people in. Not every state can eliminate its income tax, or at least can't do so quickly. And there have been states that have talked about doing this too fast.

[00:07:45]But if you have the opportunity to reduce it in a reasonable, responsible way, we certainly have that evidence that it does make the state more competitive. I've long heard the argument that oh yeah, state X or Florida for example may not have an income tax, but they stick it to you in other ways, so you're still paying the same amount.

[00:08:04]You're not paying the same amount. You are paying less. It's certainly true that other taxes may be higher. But in a state like Texas for instance, property taxes are higher than they are in the average state. On that, you're still paying way less in taxes as a household in Texas than you are in most other states. That's true of Florida as well, and Tennessee as well, and New Hampshire, and all of these other states. Yes, if you're in Tennessee, your sales taxes are high. If you're in Texas, your property taxes are high. But if you add up all of your taxes, you're paying way less in those states. You're also paying taxes that have fewer economic distortions, which means they stand less in the way of growth. So a policy maker at least doesn't just care about how much revenue is raised, they care about what it does to change economic decision making. And the income tax stands more in the way than these other taxes. I get it that states in general want to raise revenue and have a certain level of services. But are there any states that you know of that talk about eliminating the income tax and reducing spending, so you don't have to make up all that money somewhere else?

[00:09:02]Some of them have. The plans haven't always been fully developed. So Mississippi would be an example of a state that was looking at full-fledged repeal of their income tax a couple of years ago in what I thought was an unbalanced manner. I went down and testified before the state Senate and said, "You don't have a responsible plan to do this. The alternative revenue streams that you're talking about are inadequate. The sort of cuts that you would have to make to make up the difference in a state like Mississippi probably aren't going to work." And they ended up scaling that down, making a much smaller reduction. And now they have some triggers that if the revenues are there, if they have the opportunity, they will continue to reduce their rate and maybe go to zero someday. But it wasn't that cut in one fell swoop. And I think that would have been irresponsible. It wouldn't have worked for the state. People want low taxes, but they also want a certain quality of life that they wouldn't have had if the government had been cut that dramatically.

[00:09:55]Are there any interesting anecdotes sort of like that that you can talk about from other states as they've gone through this process of either doing it or deciding not to do it?

[00:10:04]Yeah, most states, especially in recent years, they've cut income taxes and it's worked for them. In fact, if you look at the states that have cut income taxes since 2021, their revenues have actually grown faster than states that haven't.

[00:10:17]Now, I'm not saying that the income tax paid for themselves if the cuts paid for themselves, they did not. But these were states that had significant growth, expected significant growth, and were able to invest a significant portion of that into rate relief. And you see the in-migration. You're seeing that in parts of the Mountain West. You're seeing that in some of the South.

[00:10:35]Southwest, you're seeing it in some of the southeastern states that have said, "This is important to us." And I mean, you look at a state like North Carolina that a decade ago really reformed its system, cut income taxes, but just broadly overhauled the system. And they turned their economy around. They were able to take their advantages like the research triangle, and instead of having those companies leave once they were spun out from the universities, get them to stay there. Get the jobs to remain there. And tax reform was a huge part of that. And we've seen that over and over again. We've seen examples of states that do this wrong. Uh over a decade ago, we saw Kansas try some really unbalanced cuts, and that's been the horror story that you hear every time. And it was real. Like, there was a really bad plan. We at Tax Foundation spoke out against that at the time, but some people just signed on.

[00:11:21]Hey, it's a tax cut, they were for it.

[00:11:23]And that has poisoned the conversation, but I think what gets missed is almost every state has had some sort of tax relief since then. 28 states just in the last less than 5 years have cut their rates and most of these really are success stories.

[00:11:37]>> [music] >> Do you know what states have the highest income tax?

[00:11:48]Yeah, the highest top rate of state income tax is 13.3% in California for high earners and then there's a general payroll tax not for UI that makes it 14.4% on wage income. So that's the highest you can get at the state level.

[00:12:01]If you want to combine state and local, then New York City is going to get you the highest you're going to get about 14.77% And then obviously adding that to the federal income tax.

[00:12:14]>> Yes, these are very high rates.

[00:12:15]>> Yeah.

[00:12:16]Um What is the Tax Foundation in just a couple of sentences?

[00:12:21]We're a tax policy research organization, essentially a think tank.

[00:12:24]We are working with lawmakers at the federal and state level and even now to some degree internationally to help them understand the implications of tax policy, understand the tradeoffs. We're trying to promote sound neutral, simple, pro-growth tax policy and helping to educate the public and lawmakers on the tradeoffs they face with these choices.

[00:12:41]>> Do you typically support doing away with the state income tax? Not necessarily.

[00:12:46]We think that income tax rate relief is a good way to return money to the taxpayers to the degree that you have that capacity. It is the tax that distorts the economy more. So if you have that opportunity, that's where I'd focus. But we've sometimes told states and lawmakers we don't think that income tax elimination should be on the table for you or you need to take this slowly because we want responsible tax reform.

[00:13:09]We want it to stick. We don't want someone to have to reverse it later. We don't want unexpected spending cuts because it didn't work. We don't want something unbalanced. So we look at the income tax as a great avenue for reform and relief. We're not necessarily saying eliminate every state's income tax.

[00:13:24]Besides Mississippi, what other states do you think are not currently good candidates for eliminating the income tax?

[00:13:32]The state that could do it the easiest, and I think should, is North Dakota. It raises very little revenue from its income tax already because most of its revenue comes from oil and gas to the point that it's such a trivial revenue generator, but has all of the compliance costs of an income tax that I would just eliminate it. It's easy for them. It's not easy in every state. There's others that I think could do it. Uh Oklahoma talks about it and has for a while. Um other states have talked about this and I think they could get there in some cases. But in most states it's a path that you would go on. And North Dakota almost could snap their fingers and do it, and maybe they should consider that.

[00:14:08]Do you see any serious possibility that the federal income tax would be reformed, changed, drastically reduced, or done away with?

[00:14:18]Not done away with. Uh we've seen reforms in 1986, certainly in 2017, some changes I wouldn't call them reforms this time around with the reconciliation act.

[00:14:29]Usually, even when simplification is the goal, policymakers end up making it more complicated. They end up offering some new deductions, they offer some new exemptions, some credits. They don't really reform the underlying system.

[00:14:41]It's hard to do. Politically not always very popular. I think the income tax is with us for the long haul at the federal level, but certainly we've seen changes.

[00:14:51]When you look at what the rates used to be in the World War II era, there was a top rate of around 90%. Uh until the Reagan administration, there were, you know, top rates well over 50%. So, we've seen a lot of relief. We also saw base broadening during that that we tax a wider range of income, but we do it at more competitive rates. There may be more of that, but the individual income tax for federal purposes is likely with us for a long time. What is the highest individual income tax rate right now at the federal level? 37%.

[00:15:21]You said it's politically difficult or it's not popular in some ways to change the federal income tax. It is among people, right? When you say it's hard to do, are we talking about special interests? Explain that dynamic.

[00:15:37]Often when lawmakers go into reform conversations, they quickly devolve into benefits for select populations. So, we see this in the reconciliation act where there's a deduction for all qualified tips. There's a deduction for auto loan interest.

[00:15:53]There's a deduction for certain overtime pay. And these benefit different people.

[00:15:58]It's not like all of these are for low-income populations. Some of them are for higher-income populations, but lawmakers often find it more politically attractive to provide these targeted benefits rather than to reform the system overall. And people don't always recognize when the system has been reformed overall. Like think back to the Tax Cuts and Jobs Act. You had for the first time a cap on the state and local tax deduction, and you had a lot of people screaming about that $10,000 cap. You also had a lower top rate. You had a change in the alternative minimum tax. You had elimination of other provisions that raised people's taxes in less transparent ways. Most upper-middle income earners had lower taxes even with the SALT cap.

[00:16:41]But all they talked about was the SALT cap. They didn't recognize they got a tax cut. They complained about the SALT cap. And if we had returned to the old system, they would have paid more, but sometimes those targeted programs are politically attractive even when they don't benefit the very individuals who are supposedly the beneficiaries of them.

[00:16:59]>> [music] >> You can watch the entire report, my cover story, on Sunday, December 14th on Full Measure. Go to sharylattkisson.com and click the Full Measure tab for a list of stations and times near you.

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