Human-to-human transmission of COVID-19 has led Florida and many state governments to issue stay-at-home orders, effectively shutting down a large portion of the American economy.
In less than a month since the nationwide economic shutdown, the Dow Jones Industrial Average collapsed more than 10,000 points from its highest valuation ever and more than 10 million people filed for unemployment benefits.
A frozen economy means challenging times ahead for state budgets — especially for those states that passed budgets assuming the historic bull market would continue.
The impending state fiscal crisis has prompted some to use this crisis to fulfill a long-time “progressive” policy goal – adopting a personal income tax in the states without one.
There are already siren calls for Florida to enact a personal income tax, purportedly to bolster state finances and make revenue more stable.
However, based on ample evidence from the other 49 states, enacting an income tax will only make tax revenue more unreliable while harming Florida’s economic growth.
Currently, nine states – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming – levy no income tax on wage and salary income.
Taken together, these nine states see higher personal income growth as job creators and small businesses are able to reinvest earnings into their businesses and increase wages for their employees rather than paying income taxes. They also see higher net domestic migration than income-tax states. In fact, 991,542 new American taxpayers moved into the Sunshine State over the past decade alone.
Florida’s lack of income tax also bolsters its economic outlook, which ranks eighth best out of all 50 states, according to the ALEC-Laffer Rich States, Poor States report.
Despite clear economic benefits for states that avoid a personal income tax, some pundits insist states should enact personal income taxes for the sake of stable, predictable revenue.
Ironically, it is none other than income taxes that drive revenue volatility and unpredictability. The Rockefeller Institute and Pew Charitable Trusts both highlight how income taxes increase revenue volatility.
Economist Nathan Seegert also explored state revenue volatility and found states’ shift in reliance toward income taxes is responsible for nearly 60% of increased revenue volatility.
California, the state most dependent on “progressive” income taxation, is staring down a fiscal cliff given the recent crisis. Due to variations in the stock market and wage income, 2021 income tax payments are expected to decline by more than $10 billion.
California’s extreme revenue volatility, due to reliance on progressive income taxes, even caused former liberal Gov. Jerry Brown to acknowledge the state’s dependence on income taxes has now caused some serious budget problems for the Golden State.
Florida would experience similar revenue volatility problems if the state shifts toward income taxation.
Income tax proponents find themselves in the awkward position of highlighting a very real problem facing state revenue collections, while offering a solution that will make the problem worse.
They are correct revenue volatility during a crisis creates serious fiscal problems; however, enacting an income tax will only increase revenue volatility. Worse yet, enacting an income tax would undoubtedly hurt economic growth in Florida.
When the COVID pandemic clears and Americans go back to work, job creators will resume looking for ways to grow their businesses and save money on taxes. Florida ensures it is best positioned for the post-COVID economy by resisting calls to raise taxes and maintaining its reputation as a pro-growth, low-tax state that avoids a personal income tax.
Jonathan Williams is the executive vice president of policy and chief economist at the American Legislative Exchange Council (ALEC). Follow him on Twitter @taxeconomist. Skip Estes is the legislative manager at the ALEC Center for State Fiscal Reform. Follow him on Twitter @Skip_Estes.
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