Every April 15, Americans gripe about having to give anything from 10%-35% of their paycheck to the government in income taxes. Unless an individual lives in Alaska, Nevada, South Dakota, Washington, Wyoming, Texas, or Florida, he would have to pay state income taxes in addition to the national tax. In addition, Tennessee and New Hampshire limit income taxes only to income that is not a result of employment such as dividends and interest income. Nevertheless, there are several reasons why many states prefer to keep their taxes relatively low.
First, paying a large state income tax on top of a heavy federal tax may be perceived as highway robbery to a high-income person. Therefore, states have to worry about such people moving to areas that impose very low (or no) taxes on income as the wealthy usually contribute to business development and creating jobs to ensure that will make the state a great place to live and work. As the state government benefits from the start-up of new businesses and a highly skilled workforce, they would logically want to make their state as attractive as possible.
The states are currently being kept aloft by revenue systems that have undergone restructuring in the past decade. They are now much more sensitive to changes in personal and corporate income” (Smith, 184). Secondly, the American Revolution was fought over taxes and the people are extremely resistant to increases in taxes. Tea Parties were staged in cities all across the nation last April 15 because people fear an increasing tax burden on top of the economic losses suffered. States especially might want to raise taxes because many are nearing bankruptcy (i. e. California) and asking the federal government for some bailout money.
There is also an exodus toward the tax havens. For example, many businesses and individuals are leaving high tax states such as California for other states that place less of a tax burden on the wealthy such as Tennessee. This phenomenon would be much more pronounced if tax rates for some of the states exceeded reasonable bounds—however, even in high tax areas like New York City, it has not yet become high enough to begin a mass exodus of people to the middle of the country. In times of recession, people would be more likely to leave expensive areas for places with a much lower cost of living.
In addition, one of the benefits for living in a state with a low (as opposed to no) income tax is a much lower burden on federal returns and lower sales and property taxes. People who live in states with no income tax usually have to pay higher federal taxes. States with no income tax also commonly make up the revenue lost from this source by imposing high sales and property taxes. A system based purely on sales tax is a regressive system where the tax burden is placed firmly with poorer households as property taxes and taxes paid on goods eat up a larger percentage of their money (as opposed to their rich neighbors).