Every state taxes its citizens differently. Most have both a sales tax and an income tax. Some have one or the other. However, in Clark’s opinion, the smartest states are ones that have no income tax at all.
Texas is among nine states that collect no income tax, helping to fuel great job growth in recent years where other states have floundered.
Not all states that have no income tax are doing as economically well as Texas, but this is usually due to prevailing real estate and housing market troubles. Once they surmount those issues, Clark believes these nine states will enjoy a much more robust rebound than the other states.
Taxing people on what they spend — not what they make — is beneficial in two ways. First, it provides folks incentive to save. Second, it encourages entrepreneurs to set up shop in that state.
Imagine if you were considering opening a business in California. The tax burden is so daunting there, unless you have specific reason to be in that location, it’d be far more appealing to open up in a state where you wouldn’t be taxed so drastically. It just makes sense.
So why are the other states lagging behind in this idea? Because by removing income taxes, it reduces the working capital of the state government, ultimately forcing the size of state government to shrink. It’s hard to determine how to reduce services once the government has gotten used to a certain level of spending.
Clark believes that if a state wants to eliminate income taxes, the way to do it is through a phased approach. If a state has a 6% income tax, reduce that rate by 1% a year over 6 years, (or 1/2% over 12 years.) This will allow the system time to adjust to a smaller tax base — and prepare for what should prove to be much better economic growth going forward.