How do states without sales tax or income tax pay for government services?

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Auditor Bob Patrick of Claremont, Calif., Asked:

How do states without sales tax or income tax pay for government services?

When it comes to the local and state tax system, there’s an analogy that experts like to use: it should work like a three-legged stool.

This means that a balanced tax portfolio should have income tax, sales tax, and property tax, explained Mehmet Tosun, professor of economics at the University of Nevada, Reno.

But America has 10 two-legged stools – states with no sales tax and no income tax. States that have waived sales taxes include Delaware, Montana, and Oregon, while Nevada, South Dakota, Washington, and Florida have waived income tax.

Alaska and New Hampshire are the only states that have neither comprehensive sales tax nor income tax.

States without income tax States without sales tax States without
Alaska Alaska Alaska
Florida Delaware New Hampshire
Nevada New Hampshire
New Hampshire Oregon
South Dakota
Tennessee
Texas
Washington
Wyoming

Tosun said the absence of both makes it “extremely difficult” to collect revenue, so to pay for government services, these two states must compensate with higher property taxes or derive revenue from alternative sources.

While Alaska and New Hampshire don’t have either of these taxes, there are a few caveats. New Hampshire technically charges an income tax on investment income at a rate of 5%, but not on wages. And Tosun noted that some local areas in Alaska have a sales tax, it just isn’t in place statewide.

Alaska currently imposes a 35% tax rate on oil and gas produced in the region. Fluctuating oil prices will affect how much the state can get out of that raw material. Since 1977, industry revenues have averaged 80% of the state’s general fund, according to the Alaska Oil & Gas Association.

On top of that, Tosun pointed out that the state has an extremely small population of around 730,000.

With rising oil prices, the Alaska Department of Revenue recently raised the state’s revenue projections this year to $ 6 billion, from $ 4.7 billion, according to Anchorage Daily News.

But the problem with natural resources is that they are limited.

“It is very short-sighted to set up your income system, so that it depends on a source of income that is depleted and also harms the climate,” said Michael Leachman, vice president of tax policy at state at the Center on Budget and Policy Priorities.

He explained that Alaska repealed its income tax in the 1980s after opening up its pipeline system.

As a result, Leachman said Alaska’s revenues are very volatile. In fact, he actually earned the unwanted superlative of having the most volatile tax revenues in the United States.

“It just makes it very difficult to run a school system and invest in the health of people, as well as in communities and families,” Leachman said.

As the state is currently facing a recovery, Alaska’s tax revenue fell 45% at the height of the COVID-19 crisis from a year earlier due to declines in oil prices and of production, according to an analysis by National Public Radio.

In the past decade, key times when prices have fallen also include 2014-2016 and 2018. The money the state raked in from the oil and gas industry in fiscal year 2019 has only accounted for that 38% of its general fund revenues, which amounted to $ 3.1 billion. , according to AOGA.

In New Hampshire, Leachman said a major source of income was his two-tier business tax. The state has a corporate income tax, which is placed on the income from commercial activity, and a corporate tax, which is placed on the remuneration, interest and dividends paid by a company.

“They also depend heavily on local governments to provide services, and therefore property taxes paid locally are higher than in other states,” Leachman said.

Residents of the state pay the third highest property tax in the country at a rate of about 2.2% – just behind Illinois and New Jersey, according to a WalletHub study earlier this year.

The Concord Monitor reported that although New Hampshire has one of the best, lowest student-teacher ratios, it ranks last in public funding for public education. Districts with below-average property values ​​have a harder time raising funds to provide adequate education, the National Education Association-New Hampshire said.

Even states without a single type of tax can face obstacles. Tosun said that in Nevada, where he is based, the state compensates for missing income taxes through the gambling economy. However, he said the state experiences fluctuating revenues because this industry – overcrowded. through competition – not making as much money as before.

States like West Virginia and Mississippi have attempted to repeal income tax, one of the pillars of the Stool, as recently as this year.

Leachman said the argument for cutting taxes boils down to the belief that people and businesses will be flocking to your area, but the evidence does not support this.

“There are a lot of states that have tried big income tax cuts in hopes of creating economic growth and it hasn’t worked out as they hoped,” he said. declared.


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