Finance

The Politics Behind Not Levying Personal Income Taxes

In the nine states that don’t levy a personal income tax, the politics of staying that course remains powerful.
by | October 2010

In New Hampshire, it’s called “taking the pledge,” a quadrennial exercise that every gubernatorial candidate must sedulously pursue: He or she must vow neither to offer up nor support establishing a state personal income tax. To do otherwise is to commit political seppuku, minus the knife.

New Hampshire is one of nine states -- including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming -- that doesn’t raise revenues through an income tax. But with states desperately casting about for ways to balance budgets, it would seem that such ironclad vows demanded in New Hampshire might be softening. After all, many economists praise the income tax for its progressive nature and fortuitous tendency to grow over time.

In Texas, Dick Lavine, a senior fiscal analyst at the Center for Public Policy Priorities, argues that an income tax is a critical staple of a mature and balanced state tax system. “It’s inevitable if you want to operate a modern and well run state,” he says. “Sales taxes just aren’t as elastic. They get hit sooner in a recession, and they stay down longer. Plus, an income tax helps offset the regressivity and performs better over the long run than a sales tax.”

It would seem to be empirically true that an income tax is vital to a balanced and up-to-date revenue mix -- after all, 41 states have one. But arguments like Lavine’s haven’t been getting much traction in the states that continue to raise cash primarily through sales, property and other taxes.

“Given how bad state revenues have been during this recession, you would think it would be a time when such a tax might become attractive,” says Senior Fellow Don Boyd, who closely tracks state fiscal issues for the Rockefeller Institute of Government. “But given the attitude toward taxes around the country, it’s highly unlikely.”

Fiscal experts confirmed Boyd’s hunch in most of the nine states. In some, legislators routinely float proposals for instituting an income tax, usually with some offset that tinkers with existing taxes. And in virtually all states where the proposition seems to be a non-starter, there were efforts in the recent past that considered where an income tax might fit into a state’s overall revenue raising strategy. None, however, led to a new tax.

The last time anyone talked about it in Wyoming was a decade ago. Former Republican Gov. Jim Geringer and the Legislature convened a tax commission -- the Wyoming Tax Reform 2000 Committee -- to look at what many viewed as the state’s fiscally unhealthy overreliance on minerals taxes.

“The commission came back with a recommendation to implement an income tax and the governor said, ‘Forget it,’” says Dan Neal, executive director of the Equality State Policy Center in Casper, Wyo. “Then came the energy boom in 2001, and a healthy pile of mineral tax revenues with it.”

John Schiffer, the highly respected Republican chairman of the Wyoming Senate Revenue Committee, concedes that the state’s heavy reliance on minerals taxes -- about 50 percent of the state’s revenues come from such taxes -- is still a concern, but quickly adds that there has been no serious discussion of implementing an income tax since the Geringer tax commission report. At that time, Schiffer remembers, “An income tax was proposed as a third leg under the table. But when the revenue committee brought it up, it just went nowhere.”

Not that Wyoming is against new taxes. Recently the Legislature voted to tax wind -- from wind farms, that is. In 2012, a wind turbine tax goes into effect.

Fluctuating Views on Income Taxes

The extent to which income taxes are a taboo subject seems to depend on the economic climate and who’s in power. A decade ago, when Wyoming was seeing mineral taxes crash, it was at least acceptable to float the income-tax concept, especially when it was a Republican who was pushing the tax-mix analysis. Today, however, with the nation’s economy limping along and a national debate occurring around whether taxes enhance or stifle economic growth, there’s a sense that taxing income isn’t politically viable in the states that don’t levy it.

The last time the idea was discussed in Tennessee -- in the early 2000s by former Republican Gov. Don Sundquist -- the electorate’s emotional response made it clear that Tennesseans wanted no part of such a tax, says Bill Fox, director of the University of Tennessee’s Center for Business and Economic Research. “The Nashville radio talk shows got hold of it,” he says, “and got people riled up.” Not even such well respected politicians as former Democratic Gov. Ned McWherter and former Republican Sen. Howard Baker, who teamed up to tour the state and proclaim concern over the state’s tax system, could sway minds. In what might be seen as a pre-tea party outbreak, a handful of citizens even tossed rocks at the Capitol.

If anything, Fox says, the current political atmosphere around government and taxes makes the proposition even more distant. “It’s absolutely off the table,” he says.

Illustrating the issue’s long-standing political volatility in the pertinent states is South Dakota, which came one vote away from enacting an income tax in the 1970s. With Democrats controlling the Legislature and the executive mansion for the first time in decades, the bill had passed the House, and former Gov. Richard Kneip vowed to sign it upon the Senate’s approval. But the Senate was deadlocked, and so it fell to Democratic Lt. Gov. Bill Dougherty (who died in July) to cast the vote that would put the tax over the top. “He was the governor’s pick,” says Jim Fry, director of the South Dakota Legislative Research Council, “and so you would think he’d be in his camp. But he had real political aspirations, so he voted against the tax.”

Meanwhile, some states never talk of instituting an income tax. Florida, for instance, has a prohibition written right into the state constitution. “It’s not a political litmus test here,” says Robert Weissert, director of communications for Florida TaxWatch. “It’s completely off the table. We have a consumption-based economy here, and so we have a consumption-based tax system.”

As if a constitutional prohibition wasn’t enough, a recent voter initiative now requires that any new statewide tax can only be enacted with two-thirds of the votes in an election. “So that’s why I can say unequivocally that barring a constitutional convention, it’s just not in the culture here,” Weissert says.

Like Florida, Nevada depends heavily on tourism and taxing consumption, and it has seen its revenues crash along with the tourist trade. There has been some talk of a corporate income tax, reports Patrick Gibbons, a policy analyst with the Nevada Policy Research Institute, but nary a mumble about one on personal income -- in no small part because Nevada, like Florida, has the income-tax prohibition written into its constitution.

Nevada does, however, indirectly get at personal income: It taxes a business’ total payroll at 1.3 percent. It’s not exactly an income tax, nor is it a corporate income tax. The latter was going to be the subject of a legislative study this year, but even the idea of studying a corporate income tax wound up dead on arrival in Carson City.

Washington State's Income Tax Ballot Measure

Currently one state out of the nine is seriously considering enacting an income tax. This November, Washington state will include Initiative 1098 on the ballot. It proposes to enact an income tax on individual Washingtonians making more than $200,000 a year; $400,000 for couples filing jointly. By way of politically sweetening the deal, the ballot measure reduces state property taxes by 20 percent and eliminates the state’s business and occupations tax -- collected on gross receipts, not profits -- for 80 percent of businesses in the state. If passed, the proposal would raise $1 billion in revenues. Use of that money is also specified in the measure: It would go toward reducing class size and funding the state’s Basic Health program.

Initiative 1098 is the lagged result of a tax study commission convened about eight years ago and led by Bill Gates Sr. Gary Locke, who was governor at the time, had appointed the Gates Commission to look at the state’s tax mix. By the time the commission reported its recommendations -- which included enacting an income tax -- the political climate was already swinging hard against the notion of a new tax. (In her 2004 and 2008 campaigns, Democratic Gov. Christine Gregoire did, in fact, take Washington’s version of “the pledge,” but she also proposed and won a considerable increase in state gas taxes shortly after taking office.)

This year though, backed by labor unions and a strong push from the elder Gates, proponents of an income tax in Washington managed to gather enough signatures to get the tax measure on the November ballot. Currently polls have the state split at just about 50-50 on the new tax.

Even if Washington voters enact the tax, it likely won’t signal the beginning of any softening when it comes to other states’ inclination toward expanding revenue options. The concept will no doubt continue resurfacing in some of the other eight states, depending on who’s in power and the economy’s condition. But right now, the anti-tax mood seems set, and Alaska appears to exemplify that mood. “It’s in the air we breathe,” says Lawrence Weiss, executive director of the Alaska Center for Public Policy. “This is ‘no-income-tax’ air up here.”

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