State Tax Trends: Tax Abolition

Midwest States Pushing to Eliminate Major Taxes

 Washington, D.C., June 8, 2012—No state has repealed a major tax since the elimination of Alaska’s income tax in 1980, but that may change soon if legislators in four Midwest states succeed with their current tax reform proposals. North Dakota, Oklahoma, Kansas, and Missouri all seek to either reduce or eliminate a major tax, according to a new analysis by the Tax Foundation.

While supporters tour the economic gains in eliminating an entire category of taxation, the question of how a state’s budget will cope with the loss of a major source of revenue is crucial to the ongoing reform debate.

“If the revenue is merely swapped with an equivalent amount from a tax that imposes similar compliance costs, nothing is gained,” said Tax Foundation Vice President for Legal & State Projects Joseph Henchman.

Supported by a 44% increase in tax revenue spurred by oil production, North Dakota looks to abolish its property tax. Oklahoma looks to reduce its income tax to a flat tax rate, and ultimately eliminate it, relying on a reduction of government spending to balance the budget. Kansas seeks to increase revenue by eliminating tax code loopholes, while also restructuring and reducing income tax rates. Missouri aims to eliminate its income tax and supplement an increased, revenue-neutral sales tax for the lost revenue.

If all proposals come to pass, an income tax-free zone could stretch from Texas north through Oklahoma and Kansas and east to Missouri.

Tax Foundation Fiscal Fact No. 308, “Trend #6: Tax Abolition” by Joseph Henchman is available online.

Read about all of the Top 10 State Tax Trends in the Recession and Recovery here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.