Why Every State Should Have an Income Tax (and a Retail Sales Tax, Too)

Abstract

Some states (like Florida and Texas) collect retail sales taxes but no income taxes; one state (Oregon) collects income taxes but no retail sales taxes; most states collect both. This paper examines the decision of a state to collect retail sales taxes, income taxes, or both in light of the state's spending policy and the ability of at least some of the state's residents to strategically migrate to another state (to take advantage of a more favorable mix of taxes and benefits). It concludes that states that rely solely (or even primarily) on either a retail sales tax or an income tax to finance their spending are generally pursuing an irrational and ultimately unstable course. Thus, states that seek to pursue an ultimately stable course must include in their revenue streams both a retail sales tax and an income tax.