Low-Tax States Cut Poverty Rates: Study

Published February 1, 2007

Fiscally prudent states appear to be winning the war on poverty, according to a recent study by the Goldwater Institute, which found low-tax and low-spending states are more successful at reducing poverty than their high-tax, high-spending counterparts.

The 10 states with the lowest tax burdens saw a 13.7 percent decline in poverty during the 1990s (more than double the national average), according to the study. Meanwhile, the 10 states with the highest tax burdens suffered an average poverty rate increase of 3 percent. The poverty rate dropped nationwide during the decade, the report notes.

The same correlation was found with spending. The 10 states with the lowest per-capita spending benefited from a sizable decrease in overall poverty. The 10 biggest spenders saw poverty increase 7.3 percent.

“How to Win the War on Poverty: An Analysis of State Poverty Trends,” by Matthew Ladner, Ph.D., examined general and childhood poverty rates nationwide from 1990 to 2000. The report was released in November.

Private-Sector Jobs Vital

“Private-sector growth possesses much greater power in the fight against poverty than government programs,” said Ladner, vice president of research at the Goldwater Institute, in an interview for this article. “When the private sector grows, aided by low taxes, more jobs are created. When more people have jobs, per-capita and median family incomes rise. Jobs, not government spending, lift people out of poverty.”

Ladner conducted his research using data from the U.S. Census Bureau. Letter grades were assigned to each state based on the amount of progress each made in reducing poverty.

Top scorers Minnesota and Mississippi each earned an A+ for reducing poverty by 22.5 percent and 21 percent, respectively.

Rhode Island and Hawaii earned the lowest grade, an F-, for significant poverty increases of 24 percent and 28.9 percent, respectively.

Arizona/California Contrasts

The study also examines an interesting relationship between two states that embraced opposite fiscal strategies during the 1990s.

In 1990, Arizona had the nation’s fifth-heaviest tax burden and a poverty rate well above the national average. California’s tax burden was much lower, ranking 24th in the nation. In 1990, Arizona’s poverty rate was 25 percent higher than California’s.

During the 1990s Arizona cut taxes, bringing its tax burden down to 25th highest in 2000. California kicked spending and taxation into high gear, raising the state’s ranking from 24th to ninth highest by 2005.

Consequently, Arizona enjoyed a significant poverty rate decrease. California’s poverty rate actually increased, from 12.5 to 14.2 percent.

The study notes California’s high taxation has been so damaging to the economy that it is on track to have a higher percentage of its population living in poverty by 2010 than Mississippi.

Big Government, Slow Growth

“There is a clear relationship between the size of government and economic performance,” said Daniel Mitchell, the McKenna Senior Fellow in Political Economy at The Heritage Foundation. “As taxes and spending rise, growth begins to suffer. The poor are the biggest victims of economic stagnation.”

Ultimately, “states that fail to limit the size of government will be harming the less fortunate,” said Mitchell. “People in other states will reap the benefits as jobs and capital flee for jurisdictions that encourage private-sector growth.”

Ladner’s study suggests the most effective way to reduce poverty is through private-sector job growth. The best anti-poverty strategy policymakers can employ, according to Ladner, is to cut taxes and lower government spending. That will create an economic climate favorable to business creation and job growth.

Jessa Haugebak ([email protected]) is a research assistant at the Phoenix-based Goldwater Institute.

For more information …

“How to Win the War on Poverty: An Analysis of State Poverty Trends,” by Matthew Ladner, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to http://www.policybot.org and search for document #20462.