As the deadline for tax season approaches, the residents of seven states are going to have one less thing to worry about than the rest of the country. People who live and file taxes in these states will have to pay no state income tax, something that costs nearly $2,000 per person in New York, the state with the highest income tax rate.
While personal income tax is usually the largest source of tax-based revenue for states, there are other sources of revenue. Some of the states without income tax make up for the revenue they are missing through sales and corporate taxes. Other states simply spend less on services to keep a balanced budget. Using recently released tax collection numbers for 2011 from the Tax Foundation, 24/7 Wall St. reviewed the seven states where residents do not pay income tax.
In several of these states, the lower revenue from income tax is made up for in other ways. Alaska and Wyoming, neither of which charge a personal income tax, actually had the first- and third-highest tax revenue per capita, respectively, in 2011.
In the case of Alaska, this is in large part due to the corporate income taxes it raises from the natural resources sector. The state collected more than $1,000 in corporate taxes per capita in 2011. No other state collected more than $450, and the average state collected just $129. In the case of Wyoming, the state collects the third-highest revenue per capita from sales tax.
Other states, however, are not offsetting the lower revenue from a lack of income tax with other taxes. Florida, Nevada and Texas are all among the bottom five states for revenue per capita. Because of their below-average revenue, spending in these states is particularly low. In 2011, state spending per capita was the fourth lowest in the country in Nevada, fifth lowest in Texas and the lowest in Florida -- $4,441, compared to a national average of $6,427 per capita.
In the states with no income tax to maintain solid revenue, like Alaska and Wyoming, spending is -- not surprisingly -- quite high. Wyoming spent $9,986 per capita in 2011, the second highest in the country. Alaska spent $15,663, by far the most of any state.
Joseph Henchman, Vice President of Legal and State Projects at the Tax Foundation, explained that the trend of low revenue states spending less is not a product of a deliberate choice by these states to operate under a conservative budget. In states like Texas, Florida and Nevada, Henchman said in an interview with 24/7 Wall St., “The decision to have a frugal government probably came before the decision to have a lower tax system.” Unlike Alaska and Wyoming, these states have chosen to spend little per capita, and so tax less as a result.
To find the seven states that do not tax income, 24/7 Wall St. studied data provided by the Tax Foundation. These states do not tax wages earned by individuals, nor do they tax interest and dividend payments. Tax rates are the most recently available, and were provided by the Tax Foundation from itsFacts & Figures Handbook for 2013. Tax collection figures are from 2011, as are effective property tax rates. Figures on state expenditure are from the U.S. Census Bureau’s State Government Finances Summary: 2011.
· Tax collections per capita: $7,708 (the highest)
· State revenue per capita: $17,630 (the highest)
· State spending per capita: $15,663 (the highest)
· Federal aid as a pct. of revenue: 24.0 percent (the lowest)
· State sales tax rate: N/A
Despite having no income tax, Alaska actually collected more in taxes per capita than any other state, at $7,708 in fiscal 2011. Because it raised so much in taxes, Alaska had the highest per capita government expenditure of any state in the U.S. during 2011, exceeding $15,000. Additionally, while the state has no individual income tax, it did have the nation’s largest corporate income tax collections, $1,003 per capita. This was more than twice any other state. Tax collections from oil companies operating in the state are currently so high that Governor Sean Parnell is considering lowering taxes to promote increased production.
· Tax collections per capita: $1,718 (7th lowest)
· State revenue per capita: $3,974 (3rd lowest)
· State spending per capita: $4,441 (the lowest)
· Federal aid as a pct. of revenue: 36.9 percent (23rd highest)
· State sales tax rate: 6.00 percent (16th highest)
In 2011, Florida brought in just $3,974 in revenue per resident, the third lowest of all states. Since revenue was lower than most, spending was also. Total expenditures per capita in 2011 was just $4,441, the lowest of all 50 states. That year, just $1,306 per capita was spent on education, among the lowest in the country. In 2011, under the leadership of Governor Rick Scott, the budget was cut further in areas like education and child welfare. Yet in February the Governor introduced a new budget of more than $74 billion that includes pay raises for teachers and state workers and expands health care services for the disabled.
· Tax collections per capita: $2,333 (25th lowest)
· State revenue per capita: $3,848 (2nd lowest)
· State spending per capita: $4,848 (4th lowest)
· Federal aid as a pct. of revenue: 27.1 percent (5th lowest)
· State sales tax rate: 6.85 percent (8th highest)
At 0.90 percent of assessed home value, Nevada’s effective property tax rate for 2011 was just below the national average of 1.12 percent. But after the housing crisis caused property values to tumble, local budgets have been strained by the loss of property taxes. This is especially troubling in a state with no income tax. The state’s revenues totaled just $3,848 per capita in 2011, less than all but one state. This was partly because it received less in government revenues than all but four others, at just over 27 percent in 2011. Additionally, as one of the nation’s most frugal spenders, Nevada did not need to raise much money. As of 2011, no state spent less on public welfare than Nevada’s $781 per capita.
4. South Dakota
· Tax collections per capita: $1,682 (3rd lowest)
· State revenue per capita: $5,028 (18th lowest)
· State spending per capita: $5,459 (10th lowest)
· Federal aid as a pct. of revenue: 45.6 percent (4th highest)
· State sales tax rate: 4.00 percent (tied for 2nd lowest)
South Dakota only collected $1,682 in taxes per capita in 2011, lower than all but two states. Due to lower tax collections, the state had lower spending on government programs. In 2011, expenditures per capita were just $5,459, significantly less than the $6,427 spent on average by all states across the country. Education expenditures were just $1,578, the eighth lowest of all states and well below the $1,901 spent per capita across the U.S. South Dakota was also more deeply indebted than most states -- debt per capita was $4,321, in the top third of all states.
Click here to see the rest of 24/7 Wall St.'s States with No Income Tax
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First published March 31 2013, 7:18 AM