Art Laffer to Georgia: No State Ever Prospered After Adding Income Tax

The great state of Georgia has, at present, a state income tax, a flat-rate tax of 5.19 percent of taxable income.

Now, the Peach State is considering repealing the state income tax to make the state more affordable for its younger residents. Testifying to Georgia state senators on Monday, noted economist Dr. Art Laffer had some pointed comments on state income taxes: Namely, that they are a bad idea.

Every state that implemented an individual income tax since 1960 had both its gross domestic product and total tax revenue decline, Dr. Arthur B. Laffer of The Laffer Center told Georgia senators Monday.
Of the 11 states that introduced an income tax in that time frame, not one succeeded in boosting their total revenue. Those states were West Virginia, Indiana, Michigan, Nebraska, Illinois, Maine, Pennsylvania, Rhode Island, Ohio, New Jersey and Connecticut.
“What I’m saying here is when a state introduces an income tax, it collapses before your very eyes,” said Laffer. Adding, “If they were to get rid of their income tax, they could return to the state they were prior to the income tax which would be an enormous improvement.”

The concern, of course, is replacing income tax revenues to avoid a hit to the state's budget. Dr. Laffer has an answer to that, too.

It’s possible, Laffer said, to do away with the state income tax and potentially even lower the sales tax if the sales tax credits were scrapped.
That point spoke directly to another concern brought up by Orrock who pointed out some states that eliminated income taxes have higher sales taxes.
"Your sales tax exemptions cost you in revenues more than the income tax collects,” said Laffer.

Nine states, at present, have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. These states typically make up the difference in other ways, like a higher sales tax. But there's a key difference: Sales taxes tax consumption. Income taxes tax production.

Here’s a Simple Solution to the Affordability Crisis: Move to a Red State.

What you tax, you get less of.

Part of the reason Georgia is considering this move is because of the state's high cost of living:

Georgia ranks among the top 20 most expensive states for single adults, Patrice Onwuka, director of the Independent Women's Center for Economic Opportunity, told the committee. With prices rising more than 20% over the last four years due to inflation, 52% of Georgians are living paycheck to paycheck, Onwuka said.
“Eliminating the state income tax would be an immediate boost in take home pay that would give women the ability to purchase the essentials they need and increase their discretionary spending,” said Onwuka.

And, if Dr. Laffer's recommendations are implemented, Georgia may actually gain revenues.

Taxation is always a hot potato for both Republicans and Democrats. But the lesson here is that taxing production isn't the right answer. Taxing purchases, on the other hand, is a largely voluntary system. Exemptions for things like unprepared foods can make it even more so, but it is those exemptions that Dr. Laffer would recommend be removed. (Note: He lists no specific exemptions.) Sales taxes, especially in places like Alaska, where there is no state sales tax but there are local sales taxes, also capture revenues from non-residents and people generally passing through; they also capture the underground economy. Even drug dealers and illegal aliens buy things, after all.

Income taxes, be it at the state or federal level, have to be one of the least effective ways to fund essential government operations. They are, however, very effective at allowing controlling politicians to place unnatural incentives and choose winners and losers in the economy, not based on the market, but on political considerations. That's one of the best reasons to repeal an income tax - and one of the greatest barriers against any group of politicians agreeing to it.

Editor’s Note: Thanks to President Trump’s leadership and bold policies, America’s economy is back on track.

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