Eliminating State Income Tax & Why That’s a Stupid Idea

Dec. 10 – Several Republican candidates for Georgia governor have proposed abolishing the state’s income tax. Here’s why this is obviously stupid.

The other day I saw something so stupid that I actually choked on my coffee.

Several candidates in Georgia have proposed eliminating the state’s income tax, according to the Atlanta Journal-Constitution.

Of course, candidates say these things constantly, jockeying for support from voters in their parties by repeating phrases like “taxation is theft” and the tired argument for “competitiveness.” I don’t know how seriously to take these proposals, but I still think it’s worth briefly explaining why eliminating a state’s income is a terrible and dumb idea, obviousness be damned.

How Georgia and Other State Rely on Income Tax

Eliminating Georgia’s income tax is stupid for at least one simple reason: Georgia uses that money to pay for important things.

The state’s personal income tax accounts for about half of Georgia’s budget revenue:

Like most states, Georgia divvies up all of its types of revenue into different funds. Still, most of the income tax revenue winds up in the state’s General Fund, the largest pot of money that makes up half the state budget.

“More than 97 cents of every dollar appropriated by the state pays for eight core priorities,” according to the Georgia Budget & Policy Institute. Here’s a breakdown of those priorities:

  • K-12 Education (40 cents of every dollar spent)
  • Health Care (21 cents)
  • Higher Education (11 cents)
  • Public Safety (2 cents)
  • Criminal Justice and the Courts (8 cents)
  • Transportation (7 cents)
  • Debt Service (6 cents)
  • Department of Human Services (3 cents)

Important stuff!

Not surprisingly, most other states rely on income taxes in this manner. According to research from Pew for Fiscal Year 2019 (i.e., pre-pandemic), Georgia is one of 18 states with income taxes providing 40% or more of budget revenue. Income taxes made up at least 25% of revenue among almost all of the remaining states with this tax.

We’ll come back to Georgia’s existing tax system, but first we need to talk about the states that don’t tax personal income.

Income Tax-less States Have Their Own Issues

Notably, former Senator David Perdue—ya know, the guy with a history of shady business dealings, and saying and promoting racist and anti-Semitic stuff—pointed to Tennessee and Florida as examples of successful states without income taxes.

Additionally, Alaska, New Hampshire, Nevada, South Dakota, Texas, Washington, and Wyoming don’t tax traditional income. Contrary to what Perdue and others say, this distinction doesn’t mean these states fare much better than their neighbors.

First, some data. Eight of these nine states rely heavily on sales taxes. (Alaska lacks a general sales tax, and instead gets most of its money from oil production through what’s called a severance tax.) That reliance is troubling for two reasons: They make these states more vulnerable to economic downturns and they are less equitable than systems in other states.

Let’s walk through this first point.

  1. Relying on sales tax revenue complements a rich tourism industry, with increases in visitors to a state by and large correlated with more sales tax revenue. Four of these eight states (Florida, Nevada, New Hampshire, and Tennessee) had tourism provide 5% or more of their GDP in 2018.
  2. However, tourism is an industry that is deeply impacted by recessions, pandemic-induced ones notwithstanding. When folks have less money to spend, they will first cut out travel and entertainment expenses. As people do this in droves during hard economic times, this can take a big bite out of states’ sales tax revenue.

This is exactly what happened for states like Florida and Nevada during the Great Recession, the former struggling so badly that the state has spent the last decade trying to dilute its dependence on tourism and gaming.

Obviously, there are several other ways that states were hurt during the Great Recession, like through the housing market debacle. Also, it’s not like states with income taxes were totally insulated during this period, either.

But there’s a reason most states use income taxes. That revenue is much more dependable, and having more tools in the financial kit can make a state more economically secure.

Frankly, it’s irresponsible to do otherwise and put all of your eggs in one basket.

As an extreme example, Florida actually uses general and selective sales taxes (i.e., item-specific taxes on stuff like tobacco) to provide over 80% of its state budget.

So it’s no wonder the Sunshine State was the sixth worst in returning state spending levels to pre-recession levels, why its most recent budget underfunded and eliminated services despite an extra $10 billion from the federal government (though it’s also due to small government-obsessed legislators), and why the state felt the need to flout COVID-19 safety precautions in order to shore up sales tax revenue (which we could chalk up to dangerously negligent leadership).

On the second point about equity, Florida and six of the other income tax-less states are the worst in terms of fair taxation (bolded below). According to data from the Institute on Taxation and Economic Policy’s Who Pays? report, here’s a list of their 10 least equitably taxing states:

  1. Washington
  2. Texas
  3. Florida
  4. South Dakota
  5. Nevada
  6. Tennessee
  7. Pennsylvania*
  8. Illinois*
  9. Oklahoma
  10. Wyoming

*While having income taxes, IL and PA use flat rates, which are widely understood to be regressive and more burdensome for lower income folks.

Pointing to Florida and Tennessee as positive examples, as David Perdue did, is just beyond the pale. Both of these states are examples not only of questionable fiscal planning, but harmful and oppressive tax systems. Framing such proposals as “pro-growth” as he and other candidates often do doesn’t change how stupid it is to say such a thing.

Eliminating Georgia’s Income Tax Would Severely Underfund State Services & Shift the Tax Burden to Lower Income Families

Thanks for humoring that sidebar. While it’s easy to dunk on states like Florida, this post isn’t really about that.

My bad.

Anyway, for Georgia to eliminate its income tax yet maintain the same level of funding for state-provided services, it would need to severely increase revenue from its other taxes.

Considering that ridding the income tax would also subtract half of the state’s revenue, it’s quite unfathomable to expect a real solution.

Some of the Georgia candidates have floated increasing rates for sales taxes, but such an increase would need to be drastic. A Georgia legislator who chairs the state house’s appropriations committee said you’d have to raise it to a whopping 17% rate—or just have the state stop spending money on public education, no biggie.

Such a move would not only make Georgia more vulnerable to economic crises, but it would also dramatically shift the tax burden toward lower income Georgians.

As it stands now, Georgia actually taxes income equitably when compared to other states. The Peach State ranks in the middle among all states on ITEP’s ranking of fair tax states, but this distracts from Georgia’s income tax structure, arguably its best structured tax system. The graduated rates ensures lower income families pay less in income taxes:

Source: ITEP.

But while the state’s current income tax structure is fair, it’s a different story for its sales tax:

Source: ITEP.

The point here is clear. Shifting away from income tax revenue and toward something like sales tax revenue—even with cutouts for things like groceries, as Florida does—would lead to a far less equitable tax climate in Georgia.

Overall, campaigning on eliminating a state’s income tax demonstrates two things: A lack of understanding how states should responsibly fund government, or of compassion for lower income individuals and families. or both. I guess it’s also equally possible this is just a cheap way to get a voter’s attention. In any case, if someone proposes something like this to you, run in the opposite direction and vote for someone else, because they’re that stupid.

Got thoughts on this piece or ideas for future ones? Feel free to comment below or shoot me a message here.

Other 101PC pieces about governments spending money:


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