States with No Income Tax: Do they Have Better Economic Growth?

When I received my first paycheck in Minnesota a few months ago, I was shocked to see that roughly 20% of my entire check was gone due to taxes. Approximately 15% was taken out for federal income tax, Social Security, and Medicare, but another 5% was taken out for Minnesota personal income tax. Coming from Florida, a state with no personal income tax, I wasn't used to having another 5% deducted.

I thought- I could've spent the extra 5% in the economy, the same argument that many Republican governors use to propose cutting the personal income tax in their states. Some Republican governors, such as Sam Brownback of Kansas, Mary Fallin of Oklahoma, and Bobby Jindal of Louisiana, are proposing to slash their state income tax to stimulate job growth and attract businesses.

However, after doing some research, it seems that this logic is flawed and my experiences in Florida seem to agree.

The chart below shows the category of tax revenue on which each state relies. Note that many states without income tax, including Florida, rely heavily on sales tax.

Composition of State Government Tax Collections, % of Total, FY 2011: States Without One of the Major Tax Sources
State	Income	Corporate	Excise	Sales	Other
Alaska	0%	13.0%	4.6%	0%	82.4%
Delaware	31.9%	10.7%	16.3%	0%	41.1%
Florida	0%	5.7%	24.0%	59.4%	10.9%
Montana	35.3%	5.4%	23.2%	0%	36.2%
Nevada	0%	0%	27.8%	46.3%	26.0%
New Hampshire	3.6%	25.1%	39.0%	0%	32.3%
Oregon	67.7%	5.8%	13.5%	0%	13.0%
South Dakota	0%	1.1%	25.0%	58.6%	15.3%
Tennessee	1.8%	9.8%	18.8%	57.0%	12.7%
Texas	0%	0%	27.8%	50.5%	21.7%
Washington	0%	0%	20.2%	60.8%	19.0%
Wyoming	0%	0%	5.1%	35.1%	59.9%
Note: Percentages may not sum to 100 due to rounding

It seems that the argument for eliminating income taxes are flawed. According to a study of economic output, unemployment, and household income from the Institute on Taxation and Economic policy, states with the highest personal income tax rates outperformed or kept pace with the 9 states that don't have personal income tax.

Per-capita economic output in the nine high-rate states (CA, HI, ME, MD, NJ, NY, OH, OR, and VT)  increased an average of 10.1% while the average growth rate for states with no income-tax was only 8.7%. 

Furthermore, from my perspective, states that rely so heavily on sales tax, such as Florida, aren't as prepared to deal with economic downturns compared to states with higher income tax rates. It is often said in Florida that we were the first state to enter the recession, but will be the last one out. Much of this is probably because of our over-reliance on the tourism industry. Florida, in my opinion, relies too much on tourism, and therefore, the sales tax generated from tourism sales. When the economy takes a dive, sales are going to decrease because people have less discretionary spending.

Sources:
http://www.bloomberg.com/news/2012-06-25/states-lacking-income-tax-get-no-boost-in-growth-bgov-barometer.html
http://taxfoundation.org/blog/states-without-income-taxes-rely-varying-forms-revenue
http://www.huffingtonpost.com/2013/01/13/income-tax-eliminated_n_2466612.html