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Could These 2 States Go Tax-Free Soon?

No one likes paying income tax, but many people pay tax twice: once to the federal government and once to their state. Yet seven states have no state income tax, and two more are thinking about joining that group by eliminating their state income tax provisions.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the provisions that Georgia and South Carolina are discussing to get rid of their state income taxes. Dan notes that competitive pressure plays a factor in income-tax structures, with Georgia bordering both tax-free Florida and Tennessee, which has no income tax except on investment income, and South Carolina located close to both of those states. But Dan goes on to discuss the concerns that some have with the proposals, including the need to raise tax revenue from other sources or find spending cuts. Dan concludes that with so many distributional issues, it could be a while before either state actually pulls the trigger and eliminates state income taxes for good.

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Read/Post Comments (20) | Recommend This Article (37)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 23, 2014, at 10:24 AM, volcan357 wrote:

    Georgia already gives a very generous exemption for retirees ($35,000) which helps it compete with Florida. In fact some rural counties in Georgia have lower property taxes than many places in Florida so overall with the exemption it might be cheaper to live in Georgia (that is for persons over 65). If you really like the tropics consider Panama as a place to retire rather than Florida. You get no hurricanes in Panama and you have attractive mountains, uses the US dollar, etc. And of course no taxes either. Only 3 hours flight from Miami.

  • Report this Comment On February 23, 2014, at 10:41 AM, dialaspc wrote:

    While I may not be the brightest person reading this article, I do know that Florida does not border SC. It does border Georgia and Alabama. South Carolina borders North Carolina, Georgia and the Atlantic ocean.

  • Report this Comment On February 23, 2014, at 10:48 AM, TMFGalagan wrote:

    @dialaspc - I sincerely appreciate the embarrassing geography lesson! I've made an appropriate revision. Thanks.

    best,

    dan (TMF Galagan)

  • Report this Comment On February 23, 2014, at 11:28 AM, Pablocruse wrote:

    Never happen in CA.....too many ILLEGALS with their hands out.

  • Report this Comment On February 23, 2014, at 11:33 AM, Rockyvnvmc wrote:

    One of the problems with doing away with a State's Income tax, is that they must find other means to derive their income from. Many make the mistake of jacking up their State's sales tax, which in turn hurts the poorest folks, the most, if it includes foodstuffs and energy . Were they to exclude these two areas, from higher taxation, then it would be more equitable, for those with the least income.

  • Report this Comment On February 23, 2014, at 12:29 PM, mamaraisedafool wrote:

    Tennessee's income tax is not on "investment income" --- It is only on "interest and dividend income" --- capital gains are not taxed.

  • Report this Comment On February 23, 2014, at 12:45 PM, pns123 wrote:

    I live in Connecticut.

    As I read this, I sit here holding my breath.

  • Report this Comment On February 23, 2014, at 1:30 PM, jimatmad wrote:

    Wisconsin's Tea Party governor has proposed a similar scheme to get rid of state income taxes.

    A Wisconsin Taxpayer Alliance study showed that, while the wealthiest Wisconsinites would get a huge windfall, the tax burden would shift downward to working class and poor Wisconsinites. Taxes would be raised for 80% of Wisconsinites, primarily in the lower income levels.

    Wisconsin's GOP plan would also raise prices on nearly everything in our stores. With most people having less money, and the price of everything going up by as much as 8%, that would be another huge Tea Party Job Killer.

    It's safe to assume that the schemes in Georgia and South Carolina would only make the rich richer and the poor poorer. And would probably kill jobs.

    I understand that IS the Republican agenda, but it should be spelled out in a financial article.

  • Report this Comment On February 23, 2014, at 2:57 PM, peterwolf wrote:

    What?? You mean California is not one of the states considering eliminating state income tax ?? I'm shocked !!

  • Report this Comment On February 23, 2014, at 3:30 PM, LazerTown wrote:

    Would really think that would put a clamp on the growth in North Carolina, since I see them as the closer comparable than Florida. Florida has a lot of it's population 400+ miles away from Atlanta. Could see it as competing Atlanta with Dallas, and with no income tax Atlanta probably cheaper, but would they have adjust property taxes up to Texas level?

  • Report this Comment On February 23, 2014, at 3:46 PM, jmb47 wrote:

    I like the idea of a higher state sales tax vs. state income tax. The wealthy would pay a higher net amount, based on high ticket items and illegals and people from out of state would also be contributing. Yes, though, there is room to consider food items, as long as it is limited to essentials. I think the State of Wisconsin has had a remarkable turnaround, as shown by our billion dollar surplus, and this would contribute rather than harm our State. "Forward" is the direction we are headed!!

  • Report this Comment On February 23, 2014, at 4:04 PM, Ks121460 wrote:

    These states will be the first ones to ask for bailouts when things go bad, and states over extend themselves. Be careful thinking that everything will remain rosy. We have an administration which believes in huge government handouts.

  • Report this Comment On February 23, 2014, at 7:47 PM, davep3464 wrote:

    These southern states have some of the worst educational systems in the country and Governor Scott Walker is trying hard to lower Wisconsin to their levels. Beware consumer, you get what you pay for.

  • Report this Comment On February 23, 2014, at 8:42 PM, Lou1962 wrote:

    Not every public service provided by a govt. entity can simply be pay as you go... there is a need for publicly financed schools, roads, etc. Reducing your tax revenue to a pittance will ultimately a decline in some if not most of these low tax states... the division or Red and Blue being played out on a grand experiment. Too bad ideology drives most of these decisions rather than data and the common good of the public.

  • Report this Comment On February 24, 2014, at 7:12 AM, Shegens wrote:

    I'm in Tennessee and no state income tax is the only fair way. We have a higher sales tax but it is fair because everybody pays, not just the working class. People have things and have money because they work. Disabled and the elderly do need breaks with taxes but the welfare class needs to pay their share some way even if it means, heaven forbid, getting a job.

  • Report this Comment On February 24, 2014, at 8:56 AM, Revernedbob wrote:

    Whether a state has an income tax or not is irrelevant. Regardless of what state you live in you are either going to pay the taxes in one form or another or you are going to go without services.

    Take Texas for example. The state that likes to brag that it is "open for business" and in the same breath tries to convince people that the taxes in Texas are low. The fact is that taxes aren't any lower in Texas than they are in most states if you take into account the property tax rates (easily some of the highest in the nation); sales tax rates; user taxes for things like auto registration and the miserable quality of social services, which in most areas of the state are on a par with our Third World neighbors to the south.

    Tennessee is a similarly bleak place, largely because it has no tax base. I have been to Tennessee, in fact most of my father's family is from Tennessee and frankly you couldn't pay me to live there. Aside from Nashville and Knoxville the place is worse than a Third World country!

    Nobody likes to pay taxes but what Americans are going to have to learn to accept is that if you want a decent social service safety net and you are going to let your government spend 50% of its budget on defense and "homeland security," somebody has to pay for it; and if we aren't going to tax corporate America and the rich then that means the rest of us are going to have to cough up the money or live in a state that is operated like a Third World country.

    Personally, I don't think we should be paying a tax on earned income at all. We should lift the income cap on social security taxes; tax gains on passive income; tax stock market transactions; tax imported goods and we should enact a national sales tax that would replace the sales tax at the state level.

    That along with a carbon tax and a few other strategically implemented industrial taxes and we could easily generate enough money to pay the country's bills without breaking the backs of the working class by taxing their meager wages to death!

  • Report this Comment On February 24, 2014, at 9:28 AM, dxfey wrote:

    Tennessee is not income tax free. They tax dividend and interest income. When I retire, my investments will be my major source of income so as a retiree I will be paying income tax.

  • Report this Comment On February 24, 2014, at 9:51 AM, puestadelsol wrote:

    I live in Georgia and it is a nice thing to have a tax break for retirement income and the state benefits from it. How can that be? As people retire they do not run to Florida or other states they/I stay in Georgia where we pay property tax, sales tax and other taxes and support business in Georgia. Before the break a lot of people when they retired moved out of state. Collecting some tax is better then colleting none at all.

  • Report this Comment On February 24, 2014, at 4:40 PM, marvin41776 wrote:

    Kentucky has a state income tax. It is so archaic, so hard to understand that not even the people working at the Kentucky Dept. Of Revenue can make sense of it.

  • Report this Comment On February 24, 2014, at 9:32 PM, HASVPRES wrote:

    I just sit here and wonder in amazement at the lefties logic that more taxes are better; and how greedy those business owners and wealth people are; for wanting to keep more of their OWN HARD EARNED MONEY! I have never had good income in my life, was unemployed most of last year; and now attempting to get out of my own ditch by starting a business. So, Dems; how's Detroit doing, how about Illinois, & of course; everyone's favorite tax haven California? Why, they're all bankrupt or on that path, of course. That's because most money that is in the hands of a government instead of the people is usually wasted. Sure, only the rich should be paying taxes; just like only the rich pay for toll roads, right? and only the rich pay sales tax and pay higher rates to purchase luxury items, correct? Why not force the rich to pay more for meals in restaurants also, while we are at it! You see, I have never believed that it was anyone else's fault that I wasn't earning a lot of money; it was only my own. One of the respondents above was "left of Stalin on some of his viewpoints, but was very "Libertarian" on others: He was right that we should abolish the "convoluted" income tax all together and go with a consumption tax instead; hereby charging lower rates for basics and a small percentage higher for luxury items. Then, all fairly pay according to what they want to buy.

    The bottom line is that most "lefty economic systems" fail, ie. Venezuela, because that's all it is; an economic system that is destined to fail!

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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