Almost four years after the Great Recession of 2008, we’re left wondering what could spur an economic recovery. The outlook is bleak. Bad federal news, such as the $15.6 trillion national debt, flows downhill.
Accordingly, the states are facing budget shortfalls and unfunded pension obligations as far as the eye can see. These financial obligations clearly were not caused by a shortfall of taxes, as state tax receipts have now recovered to pre-recession levels. The Mercatus Center at George Mason University found that from 2000-2009 alone, real state and local spending had grown 90 percent faster than real private sector gross domestic product. Unquestionably, these trends in state spending are unsustainable.
Faced with these daunting circumstances, many states have taken the lead in identifying and implementing pro-growth economic policies, and have limited the economic suffering. In the latest edition of Rich States, Poor States, Arthur Laffer, Stephen Moore, and I contrast the states that are enjoying growth with the states that continue to struggle, namely, the tax-and-spend states. We provide an economics 101 lesson, discussing the theory of incentives, and the evidence suggesting that taxpayers respond to misguided policies by voting with their feet and leaving states that become inhospitable.
Voting With Their Feet
Americans are voting very strongly against states with high taxes, as evidenced by states that gained congressional seats following the 2010 Census and states that lost seats.
At the state level, a vast majority of legislators are required to balance their states’ budgets, unlike the federal government. Therefore, taxes and spending are two sides of the same fiscal coin: many state policymakers can’t add a budget item without raising taxes or cutting spending elsewhere. Rich States, Poor States highlights the policies on both sides of the coin that lead to the greatest success.
Of particular interest, the nine states without personal income taxes are significantly outperforming the states with the highest marginal tax rates. The results are truly telling. The no-income-tax states outperform their high-tax counterparts across the board in gross state product growth, population growth, job growth – and tax receipt growth.
Lower Taxes, Higher Growth
Over the past decade, the nine no-income-tax states, on average, saw 39.2 percent greater growth in economic output, 148.6 percent greater growth in population, and 81.7 percent faster revenue growth than the average of the nine states with the highest tax rates. While the highest income tax states suffered a net 1.7 percent job loss, the no-income-tax states enjoyed job growth of 5.4 percent.
Many on the Left bristle at the idea of reducing personal income tax rates. However, let us not forget that many small businesses pay these personal income taxes as subchapter S Corporations (S Corps), Limited Liability Partnerships (LLPs), and other “pass-through” entities. These small businesses make up more than 90 percent of all businesses, employ more than 50 percent of American workers, and pay more than 40 percent of all business taxes.
Some state leaders are beginning to recognize the negative impact personal income taxes have on growth. Keep an eye on Oklahoma, Kansas, and Missouri, where the personal income tax may soon become a thing of the past. In this fifth edition of Rich States, Poor States, we also provide a case study of one of the most egregious state taxes: the unpopular and economically-damaging estate or “death tax.” We incorporate anecdotal evidence and state economic data to show why the death tax is one of the worst possible taxes for state economies.
Though there are many conclusions to draw from Rich States, Poor States, we believe there is one that stands out among the rest. In general, states that spend less, especially on income transfer programs, and states that tax less, particularly productive activities such as working or investing, experience higher growth rates than states that tax and spend more. Through statistical and anecdotal evidence, Rich States, Poor States makes a compelling case that pro-growth fiscal policy is what really makes the difference for economic vitality in the states. No state has ever taxed, or spent, its way into prosperity.
One beauty of the American experiment is that it allows states to choose which paths they will follow. We hope this publication will give lawmakers ample evidence to support pro-growth policies that bring about state economic recovery and prosperity for their citizens.
The choice is not a partisan one. As President Ronald Reagan would have said, the choice is not about Republican versus Democrat; the choice is between up or down for the future of our states.
Rich States, Poor States provides 50 snapshots from our “laboratories of democracy” for you to evaluate. Study the rankings, read the evidence, and learn about the established principles that lead to economic growth, job creation, and a higher standard of living for all Americans.
Jonathan Williams ([email protected]) serves as director of the Center for State Fiscal Reform at the American Legislative Exchange Council, and is an author of Rich States, Poor States.
Rich States, Poor States: 5th Anniversary Edition, American Legislative Exchange Council: http://heartland.org/policy-documents/rich-states-poor-states-alec-laffer-state-economic-competitive-index