Fiscal sociologists have argued for a long time that direct taxation, as an important milestone in state-building, fosters state capacity. In turn, high-capacity states not only have better fiscal capacities, but also stronger state institutions (constitutions, property rights, etc.), which are associated with economic development. This paper finds that while virtually all countries in Latin America imposed the income tax law, the policy fostered state development---and economic development---only when the law was implemented under circumstances of sustained industrial expansion. Importantly, time series econometrics allow me to distinguish between ``sustained industrial expansion,'' and short-lived economic booms. I argue that the presence of strong industrial political elites at the time of implementation of the policy marked a critical juncture in the development process. Since industrial elites were interested in adopting such policy (unlike the landowning classes), when industrialists were strong, they sought to foster its implementation. Via the political incorporation of industrial political elites, the policy was associated with the implementation of other state institutions that reversed the backwards post-colonial institutional order. However, when industrialists were weak, the political hegemony of agricultural elites was preserved, truncating both institutional and economic development. Leveraging the dual sector model of economic growth, and the fiscal sociology paradigm, I explain how balanced inter-sectoral growth, and income taxation, promoted economic growth and state consolidation in the early 20th century Latin America. The empirical strategy leverages economic history data since the 1900s for a number of Latin American countries, and the Chilean case during the 1920s to contextualize the causal mechanism.