How Low-Tax States Boost Revenue 

With thousands of businesses fleeing high-tax states like New York and California, states with no income tax or flat rate taxes are reaping the benefits of good business.

Why It’s Important 

In 1974, economist Arthur Laffer created a theoretical calculation as the “Laffer Curve,” which illustrates a sweet spot in the tax rate where government revenue is maximized and beyond which rate revenues begin to decline. Although the concept is far from incontrovertible, with leading economists like Paul Krugman arguing that revenues would be generally higher with higher upper tax rates, it is generally accepted that the only points where tax revenue hits zero are a 0% tax rate and a 100% tax rate.   

While there is no direct calculation for the sweet spot in terms of state income taxes, it is observable that states with high corporate tax rates correlate with shrinking business populations. North Carolina is growing with 2.5% corporate taxes, while New Jersey is shrinking with 11.5% rates.  

Bruce Willey, a CPA with American Tax & Business Planning in Cedar Rapids, Iowa, has worked with business owners across the country to help them understand and reduce their taxes within the rules of the tax code by taking advantage of credits and strategies. He tells Leaders Media the cutoff for business owners willing to tolerate state taxes is roughly 10% before companies seek better options.  

“Tax is one of those things where, when people look at all the factors of life, if they can go somewhere where the weather is better and avoid paying 8% to 10% to the state, that can be the straw that breaks the camel’s back. If you compare the top 10 states that have lost populations with those that lost populations, you’ll find they correlate. Nobody on the tax-planning front saw that we were about to become a much more migratory society,” says Willey.  

Backing Up A Bit 

As Willey notes, states have been blindsided by the loss of businesses and citizens seeking greener pastures. In California alone, 5% of income earners pay 70% of individual income taxes. They’re in the easiest position to move to Texas and Arizona and take their money. With prominent businesses like Tesla and SpaceX building facilities in Nevada and Texas, other high-profile companies are sure to follow. This stands to increase the state’s $30-billion budget deficit. 

“At some point, if states want to sustain their economies, they must do something. People fleeing and no longer paying into their system will cause it to erode. They’ll need to be more competitive or cut services, and what does that do to your citizenry? It gives them the incentive to flee,” says Willey. 

While the influx of migrant Americans is likely tapering off, it will likely continue in the future, with more businesses making the decision to join and make the leap more methodically. Except for businesses tied to geography—such as construction or roofing businesses—the remote economy has made it easier than ever to pick up a headquarters and move it.  

Alternative Viewpoint 

The downside of these policies is that low-tax or zero-tax states can create revenue problems or push the tax burden onto other parts of the economy. The benefit of bringing corporations and businesses to a new state, without the benefit of tax revenue, comes in the improvements to the local economy, job creation, and more centralized capital and wealth. This potentially creating a more friendly business environment, but the states still need revenue and have to find it in other places.  

As we previously reported, Mississippi Governor Tate Reeves is proposing removing state personal income taxes to incentivize migrants to relocate to his state but was heavily criticized for a move that could damage public services and infrastructure by cutting one-third of the state’s revenue, with Senator Hob Bryan saying “Mississippi desperately needs water, sewer, and roads. We cannot give away one-third of the state’s revenue and have enough money to provide basic services.”

States with no corporate tax ultimately rely on other taxes to make up the windfall—raising property taxes, fuel taxes, or sales taxes to make up the difference. 

As CNBC notes, Tennessee has a combined sales tax of 9.5%, Washington has a 49.4 cent tax on gasoline, and New Hampshire collects 67.6% of its revenue through property taxes. Nevada, Ohio, Texas, and Washington impose gross receipts taxes as an alternative to corporate taxes, taxing gross sales regardless of expenses. Even so, states like Sound Dakota, Florida, Nevada, Tennessee, and Texas spend less per student on education than other states per capita. 

Notable Quotes 

“Northeast states—Connecticut, New Jersey, and New York—are all having mass migratory flight, and they happen to have three of the most considerable tax burdens in that part of the country. California is by far the most aggressive tax-hungry state, and if they have a notion you have a dollar, they hound you with letters that you owe them money,” says Willey.  

“People have always been willing to stay in a location for family reasons, and it seems America has become more migratory. Those anchors that held people to certain states are being disrupted. And state’s economic policies are having a profound effect on that. I do some work in California, and what I’m hearing is, ‘get out of here, it’s too expensive.’ Silicon Valley has propped up California for years, but the growing states have zero income tax, flat tax rates, and states that have changed their system.” 

Corporate Tax Rates vs. Population Growth in 2021

Growing states in bold ⬆️ and Shrinking states in italics 🔽

• 1. Nevada: 0%, 1.3% ⬆️
• 2. Ohio: 0%, -0.2% 🔽
• 3. South Dakota 0%, 1.0% ⬆️
• 4. Texas: 0%, 1.3% ⬆️
• 5. Washington: 0%, 0.4% ⬆️
• 6. Wyoming: 0%, 0.3% ⬆️
• 7. North Carolina: 2.5%, 1.1% ⬆️
• 8. Missouri: 4%, 0.2% ⬆️
• 9. Oklahoma: 4%, 0.7% ⬆️
• 10. North Dakota: 4.3%, -0.5% 🔽
• …
• 41. Maryland: 8.3%, -0.2% 🔽
• 42. Iowa: 8.4%, 0.1% ⬆️
• 43. Vermont: 8.5%, 0.4% ⬆️
• 44. Delaware: 8.7%, 1.4% ⬆️
• 45. California: 8.8%, -0.8% 🔽
• 46. Maine: 8.9%, 0.7% ⬆️
• 47. Pennsylvania: 9%, -0.3% 🔽
• 48. Alaska: 9.4%, 0.1% 🔽
• 49. Illinois: 9.5%, -1.1% 🔽
• 50. Minnesota: 9.5%, 0.0% 🔽
• 51. New Jersey: 11.5%, -0.2% 🔽