How have states that have removed income tax diversified their revenue?

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With Mississippi’s passing of HB 1, the “Build-up Mississippi Act” in 2025, which phases out state individual income taxes, Kentucky passing legislation reducing the individual income tax rate from 4% to 3.5%, and Georgia reducing the individual income tax rate from 5.29% to 5.19%, the topic of reduction and removal of individual income taxes remains a widespread policy discussion.

While the gradual reduction of the individual income tax rate in Georgia has come to fruition, the complete removal of the income tax as a revenue stream — the stated objective of many legislators in both Kentucky and Mississippi — presents different policy and fiscal management challenges for state governments. When removing any tax, it is necessary to reduce expenditures, identify alternative revenue sources to make up for the loss, or some combination of the two. This raises an important question: What have states done to diversify their revenue when there is no individual income tax?

Notably, Alaska is the only state to have repealed an existing individual income tax. In the CSG South region, Tennessee repealed a tax on income interest and dividends in 2021 but has never collected a broad-based individual income tax on earned wages/salaries. In addition, Florida and Texas do not collect individual income tax. Florida has never collected an individual income tax, with an outright prohibition on the tax being established by a 1924 constitutional amendment and adopted as a part of the state’s 1968 (and current) constitution. Similarly, Texas has never collected an individual income tax, and the state has prohibited any future imposition through a 1993 constitutional amendment.

Alaska

Unlike Florida, Texas, and five other states, Alaska is the only state to have wholly eliminated an existing, broad-based individual income tax on earned income. The individual income tax pre-dated Alaska’s admission as a state in 1959 and continued until 1980.

In FY1968, during the period of individual income tax collections for the state, personal income tax accounted for nearly 13 percent of Alaska’s revenue. The oil and gas industry accounted for more than 24 percent, and federal grants accounted for 39 percent of the revenue. In FY1973, income tax represented 12.5 percent of the general fund — remaining generally flat from five years earlier.¹

After completion of the Trans-Alaska Oil Pipeline, Alaska repealed its individual income tax in 1980.² Of note, Alaska does impose a corporate income tax and limited excise taxes on individuals but is also one of five states that does not impose a state sales tax. With the pipeline, the petroleum industry boomed, increasing economic activity in the state. In subsequent years, Alaska was able to compensate for individual income tax revenue losses through growth in its severance tax and royalties from petroleum. These taxes amounted to 47 percent of state revenue in 2022.³ Alaska is in a unique position, benefiting from its access to petroleum, which continues to make up a substantial share of its general fund and represents the majority of its unrestricted revenue as seen below.

As petroleum is a finite resource with volatile pricing, Alaska set up the Alaska Permanent Fund to manage its resource wealth more sustainably. Established in 1976, the fund invests 25 percent of petroleum revenue every fiscal year in a diversified portfolio of assets.⁴ The earnings from these investments support state government and public services, helping to stabilize the budget over time. A hallmark of the fund is the Permanent Fund Dividend (PFD), an annual payment distributed to eligible Alaska residents.

Alaska’s General Fund Makeup by Year (in %)

Fiscal Year	Petroleum Revenue as a Percentage of State General Fund	Federal Revenue as a percentage of State General Fund	Petroleum-based Revenue in Total Government Unrestricted Revenue
1973⁵˒⁶	14%	20%	24%
1983⁷	79%	4%	83%
1998⁸	52%	32%	62%
2003⁹	40%	42%	85%
2013¹⁰	60%	23%	91%
2023¹¹˒¹²	24%	52%	85%

Tennessee

Tennessee’s move to eliminate the tax on individuals’ dividend and interest income (known as the “Hall Income Tax”) in 2016 was part of a broader tax reform strategy and phased out the tax fully over a five-year period. The Hall Income Tax was enacted in 1929 and applied a 6 percent levy on interest and dividend income, exempting the first $1,250 of investment income for single filers and $2,500 for joint filers. At the time of its repeal, 62.5% of the collections from this tax were retained by the state government, while the remaining 37.5% were allocated to the respective local government.

To make up for the gradual tax cuts, the State of Tennessee increased its vehicle registration fee, EV registration fee, gas tax, diesel tax, and compressed natural gas and liquified gas tax.¹³ Losing their allocation of Hall Income Tax revenue, local governments were affected the most by its removal.¹⁴ For example, the suburban municipality of Germantown, TN has experienced an annual loss of approximately $3.5 million, and nearby Memphis has experienced an annual loss of approximately $15.0 million.¹⁵

The Hall Income Tax only contributed a small percentage in Tennessee’s general fund revenue. In FY2017, the tax represented 1.1 percent of state revenue.¹⁶ In the same year, sales and use tax (with a state sales and use tax rate of 7.0%) represented 61.1 percent of state revenue.¹⁷ While it is notable that Tennessee removed the Hall Income Tax on dividend and interest earnings, the impact on state government revenue was minimal.

Conclusion

The cases of Alaska and Tennessee illustrate states’ varied approaches to adjust their revenue structures without individual income taxes and highlight the individualistic nature of the strategies needed. Alaska leveraged its natural resource wealth alongside creating the Alaska Permanent Fund to support its budget and provide long-term financial stability. The elimination of the Hall Income Tax did not significantly impact Tennessee’s revenue, but transportation fees and tax adjustments were among the alternative revenue sources utilized to offset the reduction. States considering eliminating individual income taxes must carefully assess the makeup of their state revenue, revenue-generating opportunities, and economic vulnerabilities.

End Notes

1. Alaska Division of Budget and Management, ”Revenue Sources 1973-1979, 1974, https://tax.alaska.gov/programs/documentviewer/viewer.aspx?951r.
2. Scott Drenkard, “When Did Your State Adopt Its Income Tax?”, June 2014, https://taxfoundation.org/data/all/state/when-did-your-state-adopt-its-income-tax/.
3. Yereth Rosen, ”Oil and gas companies have outsized economic impact on Alaska, says industry study”, Alaska Public Media, https://alaskapublic.org/news/2023-09-01/oil-and-gas-companies-have-outsized-economic-impact-on-alaska-says-industry-study.
4. Alaska Permanent Fund Corporation, ”Alaska’s Largest Renewable Financial Resource”, https://apfc.org/what-we-do/the-permanent-fund/.
5. Ibid.
6. Alaska Division of Budget and Management, ”Revenue Sources 1973-1979, 1974, https://tax.alaska.gov/programs/documentviewer/viewer.aspx?951r
7. Alaska Department of Revenue, ”Revenue Sources FY 1983-86, January 1984, https://tax.alaska.gov/programs/documentviewer/viewer.aspx?932r
8. Alaska Division of Finances, ”Annual Comprehensive Report”, January 1999, https://doa.alaska.gov/dof/reports/resource/98cafr.pdf
9. Alaska Division of Finance, “Annual Comprehensive Report”, January 2004, https://doa.alaska.gov/dof/reports/resource/03cafr.pdf
10. Alaska Division of Finance, Comprehensive Annual Report, December 2013, https://doa.alaska.gov/dof/reports/resource/2013cafr.pdf
11. Alaska Division of Finance, ”Annual Comprehensive Financial Report”, March 2024, https://doa.alaska.gov/dof/reports/resource/2023acfr.pdf
12. Alaska Department of Revenue, ”Annual Report 2023, March 2024, https://tax.alaska.gov/programs/programs/reports/AnnualReport.aspx?Year=2023
13. Tennessee Department of Revenue, ”IMPROVE Act”, https://www.tn.gov/revenue/tax-resources/legal-resources/archived-resources/improve-act.html.
14. “Tennessee Begins 2021 with No Income Tax After Repealing the Hall Tax”, Americans for Prosperity, December 2020, https://americansforprosperity.org/press-release/tennessee-begins-2021-with-no-income-tax/
15. Mike Palazzo,” State Shared Sales Tax Reform”, City of Germantown, March 2023, https://www.germantown-tn.gov/Home/Components/News/News/7894/30?arch=1
16. Tennessee Department of Revenue, ”2016-2017 Annual Report”, 2017, https://digitaltennessee.tnsos.gov/cgi/viewcontent.cgi?article=1001&context=revenue_annual_reports.
17. Ibid.