NCPA - National Center for Policy Analysis

Effects Of State Income Tax Repeal

September 7, 2000

States without income taxes enjoy a competitive advantage over those with such levies. This is so because income taxes discourage production rather than consumption (whereas a sales tax does the opposite), and because withholding is an efficient form of tax collection, income taxing states tend to have a higher overall tax burden.

But what would happen if a state dropped its income tax levy? On average, when states reduced their tax burden by 1 percent, real per capita personal income growth increases by 3.6 percent, according to a Joint Economic Committee study by economist Richard Vedder.

For a specific example, take Arizona. A new study from the Goldwater Institute quantifies how much Arizona would gain from phasing out its state income levy. Arizona imposes personal income taxes at marginal rates ranging from 2.87 percent to 5.04 percent, and has a flat corporate income rate of 8 percent -- scheduled to fall to 7 percent next year.

Economist Debra Roubik finds that by 2016:

  • Eliminating the Arizona income tax would lead to a 42 percent increase in personal income above projections under the present system.
  • 606,400 more jobs would be created.
  • More and better-paying jobs will lead to more sales tax revenue collections, and by 2016 the state would gain almost $9.6 billion in retail sales over the forecast increase.
  • The annual net loss in revenue over the next 16 years would average 20 percent from current projected revenue growth -- but net revenue would never decline from one year to the next.

And if the state government can't live with less, there would still be positive gains if Arizona eliminated sales tax exemptions -- estimated to be as much as $4.2 billion -- to make up for lost revenue.

Source: Debra Roubik, "The Economic Impact of Eliminating the Income Tax in Arizona," Arizona Issue Analysis No. 161, September 2000, Goldwater Institute, 500 East Coronado Road, Phoenix, Ariz. 85004, (602) 462-5000.

 

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