July 17, 2008
Local Income Taxes Clustered in States with Poor Business Tax Climates
Local-level taxes on wages, earned income, or occupational privilege have accumulated in states with poor business tax climates, according to the latest analysis from the Tax Foundation.
In Tax Foundation Fiscal Fact No. 133, tax counsel Joseph Henchman examined the resident and non-resident income tax rates of cities and counties in sixteen different states. Henchman points to six states with widespread local income taxes—Indiana, Kentucky, Maryland, Michigan, Ohio, and Pennsylvania. With the exception of Indiana, all are ranked among the states with the worst business tax climates according to the Tax Foundation's 2008 State Business Tax Climate Index.
Additionally, Henchman cites United Van Line's 2005 Migration Study which ranks the 50 states according to how many outbound and inbound moves are occurring. The migration study shows an exodus from three of the six states with high local income taxes: Indiana, Michigan and Pennsylvania.
"Anecdotal evidence suggests that moving to escape local-level income and wage taxes is not unusual," Henchman explains. "With a highly mobile population, cities are hard pressed to buck the competitive pressure for lower tax rates."
But Henchman is not dead-set against local income taxes.
"Using local income tax revenue to reduce corporate income taxes or other economically harmful taxes can still produce a friendly tax climate," says Henchman.
Unfortunately, that does not appear to be the norm in states with heavy local income taxes.
Earlier this year, Philadelphia lowered its resident income tax rate from 4.219% to 3.89%, and its non-resident rate from 3.7242% to 3.592%, but it still has the highest local income tax in the nation. Among America's 20 most populous cities (not including the District of Columbia), Philadelphia is one of just six that impose a tax on wages, earned income or occupational privilege, the others being New York City, Detroit, Indianapolis, Columbus (OH), and Baltimore.
The new analysis, "County and City Income Taxes Clusters in States with Poor Tax Climates," is available online at www.taxfoundation.org/publications/show/23363.html.
