The tax season is upon us, and most taxpayers are primarily focused on finding out their federal income tax. With the reform work that has changed many key provisions of the tax code, adapting to the new set of tax laws has proved to be very difficult for many.
Nevertheless, the Americans in most states must also worry about state income taxes. Only seven states have given their citizens the opportunity to escape the double-click of having to draw up a government revenue return and make payments to state tax collectors. However, there may be an eighth state on the track to join this elite group – if another state does not beat it.
The seven states without income tax currently
Currently, seven states have no state tax. If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, do not pay any state-level income tax.
Of course, this does not mean that these states governments do not collect other types of taxes to make up for a lack of income tax. In Alaska, Texas, and Wyoming, natural resource taxes make up much of the government-run income, while key industrial concentrations such as the casino industry in Nevada and the credit card industry in South Dakota play a monumental role to help citizens stay tax-free.
Government authorities recognize the complaint that it has no income tax in influencing decisions on where to live. In particular, retirees looking for less expensive places to stay often choose to move to tax-friendly places that allow them to continue their financial resources.
Tennessee is set to join the list
State Tennessee looked at the arguments for cutting state tax and came to the conclusion in 2016 that it would make sense to eliminate it. Even before moving, Tennessee's income tax only applied to investment income from shares and bonds, including most interest and dividends, but excluding interest from bank and credit union accounts. A 6% rate on taxpayers for much of the tax's history.
In 2016, the legislature passed a law that reduced the tax rate from 6% to 5% and initiated a plan to eliminate the tax altogether. The reform target was completed in 2017, with the tax rate falling by one percentage point from 2017 to 2020 before it finally went away altogether in 2021.
Could other states get there first?
Tennessee is far from the only state to consider getting rid of its income tax. While Tennessee took action, several other state governments saw measures to try to eliminate state-level income tax. Governors of Georgia, Idaho, Louisiana, and South Carolina were among those investigating such proposals. More recently, some office owners and candidates in more surprising places like Connecticut have discussed the potential positive consequences of eliminating state income tax – especially now that federal law restricts specified deductions for these taxes.
Nevertheless, the road to tax-free At state level there are also potential obstacles. The experience of Kansas shows the roadmaps that can come up, with Republican government Sam Brownback supporting large tax cuts early in 2010, which included elimination of company tax and corporate income tax reductions. Many legislators intended for further reductions in tax rates paid by citizens over the coming years, with the aim of eliminating them. But after controversy and financial distress, Kansas lawmakers began to increase the income tax over the last couple of years.
Keep your eyes on the volunteer state
At this time, though other states decided to eliminate their income taxes, I would probably do so with a phased approach similar to what Tennessee did. As a result, the volunteer state is almost certain to cross the finish line as the eighth tax-free US state. It's good news for the residents of Tennessee and it will be interesting to see if it asks for an extra influx of people trying to escape state taxes elsewhere.