Income Tax or No Income Tax, and What Each Choice Costs a State

Both sides of this fight have a bumper sticker, and you have seen them. One says "no income tax, no problem." The other says "no income tax, no schools." Both are reciting a slogan, and both are getting paid in applause.

Let me put it plainly: a state with no personal income tax is not a state with no taxes. Somebody still plows the roads, staffs the prisons, funds the courthouse and pays the teachers. The money has to come from somewhere, and when you take away one big source, you lean harder on the others. The honest question is not "is an income tax good or bad?" The honest question is "which set of taxes does this state want to live with, who pays under each, and what happens in a bad year?"

So let's put five states on the table, because comparing real choices beats arguing in the abstract. I picked Texas, Florida, Nevada, Wyoming and California. Four skip the broad personal income tax; one runs a steeply graduated one. For each, I will say where the money comes from, who carries the load, and where the system is soft. All of the facts in the table below are structural features of each state's tax system, not current revenue totals, and I have deliberately left out dollar figures that change every year. Check the state revenue department's website for the latest numbers.

The table

That table is the whole argument in miniature. Every state is choosing a bundle, and every bundle has a soft spot.

Texas: the constitution says no

Texas is the cleanest case study because its voters decided it on a ballot. In November 2019, Texans approved a constitutional amendment, Proposition 4, that bars the legislature from imposing a personal income tax on individuals. The point was not that Texas had one. Texas never had one. The point was to take the option off the table, so a future legislature could not drift into it.

What Texas uses instead is a mix. The state sales tax rate is 6.25 percent, and cities, counties and transit authorities can add up to two more percentage points, for a combined maximum of 8.25 percent. Businesses pay a franchise tax, often called the margin tax. The state collects severance taxes on oil and natural gas pulled from the ground. And Texas has no state property tax, but local governments (counties, cities, school districts) levy property taxes, and the property tax is where the household feels it. If you live in Texas, your real tax conversation is not about the income tax. It is about the number on the annual property tax notice.

That is the trade. A Texan keeps every dollar of a paycheck from the state's income tax, and pays the cost through shopping and through housing. Whether it is a good trade depends on who you are. A renter who spends modestly may come out ahead. A retiree on a fixed income who owns a paid-off house with rising assessments may feel the property tax like a second mortgage. We walk through that calculation in Work Out Your Own Property Tax Bill With Mill Rates and Exemptions.

Florida: the same idea, a different bill

Florida's constitution also prohibits a personal income tax, and the state leans on sales taxes and on money from visitors. The state sales tax is 6 percent, and counties can add surtaxes. Tourist development taxes on hotel stays and short-term rentals put some of the burden on people who don't vote in Florida. The state has a corporate income tax, so the "no income tax" label applies to individuals, not to businesses. Property taxes are local, and a 1992 amendment known as Save Our Homes caps how fast the assessed value of a homestead can grow each year, which protects long-time owners but shifts more of the load to other property.

Florida's weak point is its dependence on a few engines: tourism, construction and real estate. When those engines sputter, sales tax revenue falls and so does the stream from documentary stamp taxes on property transactions. A state that lives on visitors and housing is a state that feels a recession in the first quarter.

Nevada: let the visitors pay

Nevada levies no personal income tax and no corporate income tax. It collects gaming taxes, sales taxes, room taxes on hotels, a tax on large businesses' gross revenue, and property taxes. Much of that tax load falls on people who flew in for the weekend. Economists call this exporting the tax burden, and for a state with Las Vegas it is a clever bit of arithmetic: the visitor pays the room tax, the visitor pays the sales tax at the buffet, and the voter in Henderson keeps a bigger share of the paycheck.

The weak point is the flip side. A state that depends on discretionary spending by visitors takes a hard hit when people stop traveling. When a weekend in Las Vegas becomes a luxury, the tax base shrinks quickly. Nevada has to keep reserves for just that reason, which brings us to the problem of discipline we take up in Why Your State Cannot Print Money the Way Washington Does.

Wyoming: the rock in the ground

Wyoming has no personal income tax and no corporate income tax. It collects severance taxes on coal, oil, natural gas and trona, and it receives a share of federal mineral royalties from production on federal land. Property taxes and sales and use taxes round out the picture. This is the model of a state that lets the ground pay the bills.

It has worked for decades, and it carries a plain risk: energy prices and energy policy are not set in Cheyenne. A drop in prices or a shift in demand leaves the state with a hole it did not dig. Wyoming has built savings to buffer that risk, and a reader who wants to understand how a state lives this way should ask one question of any resource-funded budget: what happens when the resource price halves? That question, put to a state or to a business, is a good discipline.

California: the graduated model

California runs the opposite experiment. It has a graduated personal income tax whose top rate is among the highest in the nation, a sales tax, and a corporate tax, with property tax constrained by Proposition 13. That structure pushes a large share of the load onto high earners, and the state's revenue rises and falls with their incomes and with capital gains. In a boom, receipts surge. In a bust, they fall off a cliff, which is the first thing a budget director has to explain to a legislature that has already spent the surge.

That volatility is not a conservative talking point. It is a documented feature of the structure, and the state's own budget analysts have written about it for years. The conservative point is what follows from it: a government that spends the boom as if it will last forever is a government that has to raise taxes or cut services in the bust. That is not a partisan observation. It is just arithmetic, and a good argument for building Proposition 13 and the Tax Revolt That Rattled Every Statehouse style limits on how fast spending can grow.

A simple, hypothetical comparison

To see how the two models treat different households, take two labeled hypothetical families in a simple setting. Ignore deductions, credits and exemptions, because the point is the shape, not the precision.

• The Reyes family (hypothetical) earns $60,000 and spends $40,000 on goods subject to a 6.25 percent state sales tax.
• The Whitfield family (hypothetical) earns $300,000 and spends $90,000 on goods subject to that sales tax.

Under a sales-tax-only state: the Reyes family pays 0.0625 × $40,000 = $2,500. The Whitfield family pays 0.0625 × $90,000 = $5,625.

Under a state with a flat 4 percent income tax and no sales tax: the Reyes family pays 0.04 × $60,000 = $2,400. The Whitfield family pays 0.04 × $300,000 = $12,000.

Look at what happened. Under the sales tax, the lower-income family pays about 4.2 percent of its income ($2,500 ÷ $60,000 = 0.0417), and the higher-income family pays about 1.9 percent of its income ($5,625 ÷ $300,000 = 0.01875). Under the flat income tax, both pay 4 percent. That is the strongest case against leaning on sales taxes, and I will state it fairly: a sales tax takes a bigger slice of a smaller paycheck, because families lower on the income ladder spend most of what they earn.

The strongest objection, answered

The critic says: a state that rejects the income tax pushes the cost down the ladder and underfunds services. Sales and property taxes are regressive, and the services such a state delivers, from schools to roads to health care, tend to lag.

Here is the answer, in three parts.

1. The regressive effect is real, but it is not a law of nature. States can narrow it by exempting groceries and prescriptions, by offering homestead exemptions and circuit-breaker credits for lower-income homeowners, and by keeping the rate low and the base broad. Our piece on Sales Tax, Property Tax and Who Really Pays for Your State explains why a broad base and a low rate have a conservative logic of their own.
2. A graduated income tax is not free of cost to working families either. It can reach into middle-income brackets, and it hands the legislature an easy lever to pull whenever it wants more money. Voters seem to understand this. In November 2020, Illinois voters rejected a constitutional amendment that would have allowed a graduated income tax in a state that had been tied by its constitution to a flat rate.
3. Services do not follow tax models neatly. States with different structures deliver very different results, and the differences owe as much to how well money is spent as to how it is raised.

The honest takeaway is that the debate is about trade-offs, not about villains. If a state keeps income taxes low or absent, it must keep spending discipline. If a state leans on high earners, it must plan for volatility.

Who each model suits

• Low or no income tax, high sales and property tax (Texas, Florida): suits workers who earn well and spend modestly, and states with large tourist, commercial or energy bases that can carry some of the load. It is a poor fit for fixed-income homeowners if assessments run up fast and no relief exists.
• Visitor-funded (Nevada): suits a state where tourism is the economy. It requires reserves for the bust.
• Resource-funded (Wyoming): suits a small population sitting on valuable minerals. It requires savings and a realistic view of price cycles.
• Graduated income tax (California): suits a state with a very high-earning tax base, and it demands a plan for revenue swings.

For a larger frame on why states can run these experiments in the first place, see Interstate Competition Is Why States Cannot Afford to Be Lazy, and for the myths that muddy every tax conversation, seven tax myths that scare working families and cost them money.

The bottom line

• Every state raises the money it spends. Taking away the income tax moves the burden to sales, property, mineral or tourism revenue, so ask what replaces it and who pays.
• Low or no income tax is a defensible choice, and a popular one. It works best with spending discipline and a rainy-day fund, because the replacement taxes can swing hard in a downturn.
• Sales and property taxes can weigh heavily on fixed-income and lower-income families unless the state builds in exemptions and relief. A conservative case for low taxes is stronger when it protects the family at the bottom, too.
• Before you vote on a tax change, read the revenue department's own breakdown of where your state's money comes from, and ask the candidate which tax goes down and which goes up.