While the federal government has recently raised the individual income tax rates on high-income individuals, the prospect of some states eliminating the individual and corporate income tax is quickly gaining steam.
Louisiana Governor, Bobby Jindal proposed to eliminate the individual and corporate income tax and offset the lost revenue by increasing the sales tax rate and reducing business exemptions to the sales tax. Gov. Jindal’s reasoning for eliminating the income tax is to help the state become more business friendly and to attract more individuals. Most of the top five states in the business climate rankings do not have an individual income tax and had better economic performances in the past decade than states with an income tax.
Meanwhile, Nebraska Governor, Dave Heineman followed suit and became the second governor in the last week to propose eliminating his state’s individual and corporate income tax in order to become more competitive with neighboring states. His state’s top individual income tax rate of 6.84% is the highest of any neighboring state. Nebraska would make up the lost revenue by eliminating as much as $2.4 billion in sales tax breaks for businesses among other items.
If Louisiana and Nebraska move forward on their proposals to eliminate their income tax, they would join Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming as states that do not tax individual income (New Hampshire and Tennessee don’t tax earned income, but do tax interest and dividend income); and would join Nevada, South Dakota and Wyoming as states that do not tax corporate income (Ohio, Texas and Washington do not tax corporate income but tax the gross receipts of businesses).
Louisiana and Nebraska are only in the early stages of discussions, but don’t be surprised if a few more states announce similar plans in the coming months.