Abstract
There are only seven states in the United States that do not tax their residents based off of their income, Texas being among these. By choosing to forgo the state income tax, the business climate is able to remain prosperous and appealing to companies, Texas earns a regressive taxation reputation, and the public finance scene attains their input differently while still being able to produce the same output. Perhaps an alternate way to still collect enough revenue without imposing a state income tax and not placing a bigger burger on the lower-class would be by implementing the value added tax. In what follows, we will dive deeper into this potential solution and the impacts that are occurring based on Texas’s decision to refrain from utilizing the state income tax.
Keywords: State Income Tax, Progressive Taxation, Public Finance, Four, Five
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Income Tax
Living in the modern day comes with the responsibility of paying taxes. In order to provide their citizens with infrastructure, welfare programs, and other public services, governments rely on tax revenue. One way to collect some of this fund is by charging individuals based on their income. The federal government charges individuals at different tax rates depending on the amount of money they receive annually. In addition to the federal government, state governments also attain the right to tax you based on your income. When the state levies a tax based on income it is called the state income tax, and for most states, it brings in a sizable chunk of their funding. For example, individual income taxes in 2015 allowed state governments to collect three-hundred and thirty-six billion dollars which came out to be 18 percent of state general revenue. When states opt to not tax residents based on their income, they have to come up with alternative ways to make their revenue and therefore experience several consequences.
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State Income Tax and the Business Climate
Texas has been able to establish a great business climate. This establishment has even earned some recognition from Business Facilities Magazine in 2017 as they ranked Texas as the top state in the nation for the Best Business Climate. Texas, in comparison to the other 49 states, was able to achieve the best overall performance. Governor Greg Abbott feels that there are several pro-growth economic factors that come into play when attracting businesses and helping free enterprise flourish including “restrained government, lower taxes, smarter regulations, right-to-work laws and litigation reform.” Abbott also shares his belief that Texas gains an edge over competitors because they do not overtax and overregulate like the majority of other states. By creating this prosperous environment for businesses has paid off big for Texas by attracting big and small corporations alike which in turn create job openings. These jobs lead people to be paid and once paid they will spend it, creating this huge web that promotes continual growth.
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State Income Tax and Progressive Taxation
Whenever people look into the tax system in Texas, a vast portion of them would suggest that it is too regressive and places too much of a burden on the lower-income individuals within the state. At first glance, regressive taxes might seem to be impartial, because everyone pays a fixed amount regardless. However, upon digging deeper you realize that such taxes actually cause members of lower-income groups to compensate a larger portion of their income than it does for members of higher-income groups. Taxes that fit into this bracket include sales and use taxes, which are consequently the main taxes that Texas uses since it does not implement the income tax.
Due to this, there have been intermittent calls to establish the state income tax. The people that support this argument that it will provide a more fair tax method as well as a more stable one. The state income tax can be made progressive, meaning the tax burden will fall more heavily on upper-income individuals rather than a flat rate being applied equally amongst everyone. According to a study conducted by the Institute on Taxation and Economic Policy in 2015, found that “among the states, Texas had the third most unfair tax system in the nation. The study estimated that in Texas, people with incomes at the bottom 20 percent paid 12.5 percent of their income in state and local taxes, while those with incomes in the upper 1 percent only paid 2.9 percent of their income in taxes.” This study shows that those pushing for the state income tax to make Texas’s taxation fairer and more productive, have a justifiable argument.
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State Income Tax and Public Finance
Since Texas does not have a state income tax, it must make its money elsewhere in order to still serve the public as best as it can. The most important tax in terms of financing the Texas government is the sales tax, according to “Governing Texas”. We can see their conclusion was most likely drawn from the statistic for the “2016-2017 biennium, the sales tax is expected to account for 58.8 percent of the total tax collections in the state.” The modern sales tax rate rest at 6.25 percent on the price of all retail sales. Other tax revenue comes from taxes on oil production and regulation, natural gas production, motor fuels, motor vehicle sales and rentals, tobacco, and alcoholic beverages among others. In addition to tax revenue, there are around 400 different types of funds in the state treasury where their money can be directed to an array of functions. So, while some might assume that without the state income tax government service to the public will be minimal, Texas has been able to create a budget that still allows them to facilitate a healthy environment for its citizens, debunking the “low tax-low service” esteem. Another benefit to public finance is the promotion of consumer spending. Without people having to spend money on their taxes, they will be able to buy goods and services from businesses.
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Alternative Solution to the State Income Tax
Texas could introduce the value added tax system. The value added tax system is the difference between the price a business sells a good for and the price at which that business purchased it from another. I feel like this system would help out the citizens in Texas, because this would allow businesses and corporations to pay money as a source of income for the government which could then lower the sales tax rate. While I understand lowering the sales tax rate will make no difference in the percentage gap the wealthy and the poor are spending, it will indeed lower purchase costs for the lower-income individuals. However, implementing this system would take a hit at Texas’s reputation of being a business-friendly setting. Businesses might, in turn, increase their prices to accommodate their new expenses or even seek to move to one of the other six states without the corporate income tax. It appears that there isn’t a perfect alternative yet, however, this value-added tax system might serve as a building block to find it.
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Conclusion
The impacts of having no state income tax have been displayed throughout Texas’s economic and socioeconomic scene. Overall, it has been a huge contributing factor in allowing Texas to foster an environment which businesses seek and prosper in. The ability to please businesses has paid off for the people, as these companies are able to open up many job positions. The public finance scene looks different in terms of how the state makes their earnings, but has not altered how the government serves its people.
An alternative system for raising funds could be the added value tax, which turns towards businesses to pay a tax on the worth they add to the product. This would not be a huge hit for the businesses, but would allow the state to lower the 6.25 percent sales tax rate.