State Income Taxes: Washington Remains 1 of Only 7 Income Tax-Free States

Almost every state has an income tax, but there remain seven holdouts: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. The November 2, 2010 election saw an initiative on the ballot in Washington that would have implemented a statewide personal income tax on individuals making over $200,000 and couples filing jointly who make over $400,000. It failed handily – 65% to 35%.

Most of the arguments against the initiative centered around the idea that the income tax would later be extended to all individuals in the state, not just the wealthy. The concern was that, in the past, the legislature had broadened the reach of initiatives without a public vote, and would do so again in extending the income tax as soon as it could.

Supporters of the initiative pointed out that one of the terms of the initiative stated specifically that, “No provisions of this chapter may allow the imposition of tax upon joint income below $400,000 ($200,000 for individuals).” This appeared to be a tightly written provision that did not leave room for extension, but even so, some supporters gave personal assurances that if the legislature attempted anything of the sort, they would enact a ballot measure so that the people would have a say.

Nevertheless, voters seemed unwilling to even give the legislature the opportunity. Another popular argument made against the initiative was that it would make it more difficult to draw new employees to Washington, thus stifling economic growth at the worst possible time. Additionally, opponents pointed out that there was no deduction allowed for charitable contributions under the initiative. The tax itself was also high – it would have placed Washington’s income tax among the five highest in the nation.

An Unfair Advantage for the Wealthy?

On a larger scale, states without an income tax place a bigger burden on low-income individuals, who end up spending 11-17% of their income on property, sales, and excise taxes. By comparison, the richest individuals spend only 2-3%, so states without income tax do tend to appeal to the rich. Retirees often look at a state’s income tax to see whether that state will be a good place to retire. Corporations in states without income taxes often have a competitive advantage over corporations in states that do, particularly in drawing talented employees.

It will be interesting to see when, if ever, any of the seven income tax-free states implements income taxes, and the effect that will have on its economy.