Blue States Join Red States on Tax Reform

Published August 22, 2014

Though conservative “red” states have more competitive tax systems and regulatory systems, legislators in many liberal “blue” states are responding with good reforms of their own, according to the latest volume of the American Legislative Exchange Council’s annual Rich States, Poor States report. 

Seventeen states enacted important tax reforms in 2013, making it “a standout year for tax changes in the states,” the authors write.

ALEC released the report’s State Economic Competitiveness Index in April, and in August it followed with the release of three new chapters: one on important state policy developments of 2013 and the first half of 2014; the second on the migrations of people and their wealth; and the third on the real-world effects of government policies such as minimum wage laws, estate or “death” taxes, and tax burdens.

Coming to Grips with Reality

“There’s been positive tax reform” in many states, including Indiana, North Carolina, and even Maryland, “which has started to show a pulse after many years of bad economics,” said report coauthor Jonathan Williams, director of ALEC’s Center for State Fiscal Reform. His coauthors are economists Stephen Moore of the Heritage Foundation and Arthur Laffer of Laffer Associates, an economic research and consulting firm.

In a conference call, they noted Maryland legislators passed a bill to raise the estate tax exemption almost fivefold over the next five years. The larger the exemption, the less tax that must be paid. In Rhode Island, another sky-blue state, legislators approved increases in the estate tax exemption and cut the corporate income tax rate from 9 percent to 7 percent. New York, which ALEC ranks last in competitiveness, saw its governor sign a bill to reduce the state’s corporate tax rate.

“Even in deep blue states, they’re realizing these kinds of changes are necessary to stay afloat,” Williams said.

He said most Midwest states “have been realizing the need to compete,” including Kansas, Michigan, Missouri, and Wisconsin.

Even in Illinois, which is dominated by Democrats and has one of the worst competitiveness rankings in the nation, legislators ultimately resisted calls to impose a tax surcharge on millionaires and replace the state’s flat-rate income tax with a “progressive” one with higher tax rates on higher incomes.

Illinois, Maryland, Minnesota, New York, and some other states still appear to be “trying to tax themselves into prosperity,” said Laffer, whereas other states have embraced more pro-growth policies.

Internet Info

“Rich States, Poor States 7th Edition,” American Legislative Exchange Council: