If asked to name the best policy development in recent years, the easy answer is Javier Milei’s rescue of Argentina.

If asked the same question, but told to focus on the United States, there are two possible answers.

• The shift to school choice at the state level.
• The shift to better tax policy at the state level.

Regarding the latter, here’s a tax ranking I did last year compared to one I did in 2018. The big difference now is more flat tax states (column 2) and fewer graduated tax states (column 4).

But one disappointment is that there’s been no change in the number of states in column 1. Indeed, the state of Washington may not belong any more since it now has a capital gains tax (and may be about to fall off the wagon entirely with an orgy of class warfare).

However, we may soon get some good news.

Mississippi has enacted legislation to gradually phase out the income tax, and other states (such as Georgia, Oklahoma, South Carolina, and Missouri) are making similar noises.

As a long-time proponent of getting rid of state income taxes (and I fantasize about the same outcome for the entire nation), I obviously hope more states join column 1.

And I’ve shared evidence that zero-income-tax states have better economic outcomes (and people certainly are “voting with their feet” in favor of those states).

Now we have some new evidence, courtesy of some new research published by the Council of Economic Advisers. Here’s the reason for the study.

…of the 9 states that currently have no personal income tax, 5 of them rank amongst the top 10 states in terms of GDP growth over the past decade and 4 of them rank amongst the top 10 states in terms of net migration rates from other states.1 At the other end of the spectrum, high-income-tax states like California, New York, and New Jersey have suffered a population exodus as people vote with their feet and wallets. Perhaps seeing Texas, Tennessee, and Florida as models, an increasing number of states with income taxes have indicated an interest in transitioning away from the income tax through some combination of belt-tightening and finding less damaging forms of tax collection. …the analysis here studies two different scenarios. In the first scenario, the state pursues full revenue replacement by broadening the sales tax, leaving the baseline forecasted growth of total tax revenue unchanged. In the second scenario, the reform combines a broader sales tax base with a limit on spending growth that maintains government services at current levels instead of allowing their continued expansion.

The study looked at existing academic research and found that some types of taxes do more damage than others (as previously noted here and here).

The study then investigated two ways of abolished state income taxes, one of which would include a TABOR-style spending cap.

Crunching the numbers, the CEA economists found that states would enjoy more growth and higher wages if they eliminated their income taxes.

To quantify the impacts of these tax changes on state GDP, the CEA utilizes an extended version of the same user cost of capital (UCC) model… The increased investment resulting from reduced user costs gradually builds up the capital stock to a new level, which leads to GDP increasing to a new steady state level over time as well. …We…find that shifting the burden of taxation from income to consumption increases GDP. …Higher investment leads to a larger capital stock, which makes workers more productive and increases the demand for labor. The intensified competition to hire workers then bids up real wages.

Here’s a useful summary of the benefits to states that abolish income taxes.

I’ll close by asserting that a state spending cap is almost surely a necessary condition for getting rid of a state income tax.

As I’ve repeatedly noted (here, here, and here), you can’t have good tax policy in the long run without good spending policy.