Voters in Tennessee are set to decide next week whether a state income or payroll tax should be declared unconstitutional through an amendment to the state constitution, the Washington Examiner reports.
The argument from advocates of the amendment is that the permanent abolition of the state income tax would encourage businesses to relocate to Tennessee, since the legislative move would provide a much stronger degree of tax environment certainty than simply lowering rates or temporarily removing the income tax.
If the amendment process moves forward, businesses could invest without fear that the state income tax would be constantly fiddled with from one legislative session to another. Eight other states have no income tax, either, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington and Wyoming.
“Not having an income tax has already brought jobs to Tennessee, and voting ‘yes’ on [question] 3 will bring even more jobs,” said Republican state Sen. Brian Kelsey, a sponsor of the legislation moving for an amendment.
Based on Census Bureau data, the eight states and Tennessee together have seen a strong boost in median employment, as compared to states with the highest marginal income tax rates, like California, New York, Hawaii, Oregon and others. The difference is startling. In states with no income tax, average job growth hit up to 11.5 percent. States with high tax rates only saw 2.9 percent growth.
“The way to increase tax revenue is not to increase the taxes but to increase the number of taxpayers,” Jonathan Williams, director of the American Legislative Exchange Council’s Center for Fiscal Reform said, in noting that one of the effects of low to non-existent income tax rates is that they encourage people to move to that state.
However, the effect of an increasing population isn’t enough to compensate for the revenue shortfall. And so while sales tax across the U.S. averages 4.5 percent, in Tennessee, the tax is posted at seven percent, up from five percent just a few years ago. Additionally, Tennessee taxes dividends and interest income, at six and five percent, respectively. Some argue that the emphasis on consumption taxes disadvantages the poor.
“It was 5 percent just a few years ago,” said Dick Williams, chairman of Tennesseans for Fair Taxation. For Williams, sales taxes fall on residents with low-incomes. “An income tax would grow more in line with people’s needs.” Still, even sales taxes are lower in states without income tax. High income tax, in fact, is actually correlated with high sales and property taxes.
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