Policy Documents

Taxes Really Do Matter: Look at the States

Arthur B. Laffer and Stephen Moore –
September 11, 2012

Barack Obama and the Democrats in Congress are betting the future of the U.S. economy on a gamble that tax rates don’t matter: so raising income taxes, dividend taxes, and capital gains taxes in 2013, won’t hurt the economy. The evidence from the states, however, suggests just the opposite is true. We’ve looked at the evidence for more than two decades, with data dating back to 1960, and we’ve found that in any 10-year period you look at, the no-income tax states consistently outperform the equivalent number of the highest income tax states.

For example, over the most recent 10-year period, 2001-10, the average of the nine states without income taxes—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—had 14% growth in population—versus 9% for all states and only 5.5% for the nine highest income tax states—Oregon, Hawaii, New Jersey, California, New York, Vermont, Maryland, Maine, and Ohio. Job growth in the nine no-income tax states was 5.5%, versus close to zero in the average state and -1.6% in the highest tax states. On balance, no-income tax states have two and one-half times the population growth of the highest income tax states, and yes, the no-income tax states even have higher tax revenue growth than the average of all states and the highest income tax states.

The California/Texas comparison is especially eye-popping. California has one of the highest income tax rates at 10.3%, and Texas has no income tax. Admittedly, one swallow does not a summer make, but it is astonishing that over the 10-year period from 2001 to 2010, Texas gained nearly 870,000 net migrants from other states while California lost over 1.5 million people to other states. Texas’ gains and California’s losses are nowhere more apparent than in the Census results for the 2010 congressional reapportionment: Texas increased its congressional delegation by four seats, and California did not gain one single seat. Yet, the politicians in Sacramento are currently sponsoring a ballot initiative to be voted on this fall that would, retroactive to January 1, 2012, increase the top tax rate from more than 10% to more than 13%—the highest in the nation.

Based in part on these powerful results, which have been replicated by numerous economic studies,1 many states like Kansas, Missouri, and Oklahoma are seriously considering abolishing their income taxes to accelerate growth. And so now the left is fighting back.