The White House Council of Economic Advisers has published a new report titled, The Economic Impact of State Income Tax Elimination. From the report’s executive summary:

For years, no-income-tax states like Texas, Tennessee, and Florida have often led the pack in attracting and retaining residents looking to put down roots where they do not have to split ownership over the fruits of their labor with state government. In particular, 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. 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.

This paper studies the economic impacts and feasibility of states phasing out their income tax. Recognizing that states have to collect tax revenue somehow, 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.

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Key findings from CEA’s analysis of state income tax phase-outs include:

• A 1 to 1.6 percent increase in the level of GDP for the average state;
• A 16 to 19 percent increase in new startups for the average state;
• A $4,000 increase in the average wage;
• A significant influx of new high-income taxpayers;
• An average state sales tax rate of under 8 percent under full revenue replacement with no limits on spending growth;
• An average state sales tax rate of 6.2 percent under a scenario with spending growth limits.

In his analysis of the report and its methods, Jared Walczak at the Tax Foundation argued that “[w]hile the CEA’s analysis of the benefits of reduced reliance on income taxes is sound, its revenue replacement estimates are not,” pointing out that the CEA’s report assumes a sales tax base that includes, among other items, all healthcare expenditures (including those paid by the government through Medicare and Medicaid). Rerunning the calculations, Walczak comes up with a higher replacement sales tax rate of 17.51 percent.

That said, setting aside methodological problems with the CEA’s report, it is perhaps worth observing that what is envisioned by the CEA is, in fact, much closer to the national consumption tax favored by many economists than the current sales tax regimes in place in most states (though the CEA does not advocate for a national consumption tax). This is consistent with a broader shift in the Trump era towards revenue raising through consumption taxation, as most vividly illustrated through the tariff regime.