States and localities are facing budget shortfalls and unemployment rates not seen since the recession of the early 1980s. How elected officials choose to solve their budget problems will determine whether economic growth and jobs return to a state or locality or whether residents decide to vote with their feet and move to greener pastures.
A recent National Foundation for American Policy study authored by Dean Stansel, an economics professor at Florida Gulf Coast University, explains the connection between tax policy and economic growth. The study found employment growth between 2000-2006 was 54 percent higher in the 50 metropolitan areas with the lowest tax burden than in the 50 highest-tax metro areas. (Tax burden was measured for state and local taxes as a percent of personal income in 1997 for all 381 metropolitan areas.) The research also showed personal income growth was 80 percent higher between 2000 and 2006 in the 50 areas with the lowest state and local tax burden than in the 50 highest-tax metro areas.
As the study notes, “The results suggest a clear negative relationship between state and local tax burdens and local economic growth.” Stansel found the tax burden was nearly 50 percent higher in the 50 highest-tax areas than in the 50 lowest tax areas (13.1 percent of income vs. 8.8 percent of income). “All else being equal, individuals will tend to flee high-tax areas and flock to low-tax areas,” said Professor Stansel. “That is another reason why we would expect areas with lower taxes to see higher growth of population, employment, and income.”
The lessons locally can be seen nationally. The current Administration in Washington, D.C. is seeking to increase an assortment of taxes on everyone from entrepreneurs to the middle class in the form of increased income tax rates and more mandates, such as higher taxes on health insurance plans, medical devices and individuals who do not purchase insurance.
A simple rule to remember is if you make something more expensive, then you will likely get less of it. If success in business is taxed more, expect less risk-taking in the form of startup ventures. If labor is taxed more heavily and/or new employment costs are mandated on employers, then expect employers to hire fewer new workers than they would otherwise.