Proof that State Prosperity is Linked to Generous Tax Policies

Posted: Jun 24, 2015 12:01 AM
Proof that State Prosperity is Linked to Generous Tax Policies

For decades, Americans have left the Northeast and Midwest in droves for the South and West. Explanations range from the South and West’s employment prospects to their warmer climates, but policy is the real key here.

Americans are voting with their feet by moving from failing blue states such as Illinois and New York to booming red states such as Texas and Nevada.The Nature and Causes of the Wealth of States, a book by Dr. Arthur Laffer, Stephen Moore, Rex Sinquefield, and Travis Brown, proves this is no accident. Low tax rates encourage intrastate consumption and investment, which in turn bolster states’ economies. This policy aligns with the Republican philosophy and helps explain why red states beat blue states on measures ranging from business investment to population growth to gross state product (GSP).

High individual income tax rates produce low state revenues and population growth rates because “you can’t balance your budget on the backs of the unemployed or collect tax revenues from people who leave your state.” The 11 states that enacted and then increased income tax rates since 1960 have plummeting GSP and tax revenues, with West Virginia experiencing a 50 percent population decline and 47 percent GSP decrease in GSP as a portion of the country. Similarly, as the book argues, the longer taxes are entrenched in the economy, the greater the relative decline in tax revenue and income compared to the pretax period.

The authors prove tax rate hikes can lead to worse and fewer public services. At least half of the 11 new income tax states saw their National Assessment of Educational Progress 4th grade reading and math and 8th grade math scores decrease relative to the rest of the country. Seven of the 11 states also decreased their health and hospital full-time employees they had relative to the rest of the country, with Rhode Island reporting a 53.9 percent decrease from 1971­–2011. Only three states experienced a decrease in the poverty rate since they enacted income taxes.

Whether a state has an income tax burden is also important. Nine states lack personal income taxes, including Alaska, Florida, and South Dakota. Over the past decade, these states saw a net 3.9 percent increase in population due to interstate immigration, while the nine highest income tax burdened states had a net loss of 2.2 percent. The nine zero-earned income states saw their non-farm employment growth increase by an average of 1.7 percent more and aggregate state personal income growth increase by 12.3 percent more than the nine highest tax burdened states in the past decade.

Some taxes are more harmful than others. The aptly named “death tax” has been proven to destroy revenue. The 29 states without death taxes beat their counterparts in net domestic in-migration and employment, population, and personal income growth. States with high property taxes face similar outcomes to those with high income taxes. States with a high sales tax burden outperform states without sales taxes in GSP and population growth because they draw revenue from a large tax base unobtrusively, making sales taxes the best form of taxation.

Taxes are a necessary poison and enable states to provide their citizens with valuable goods and services. When relied on too much, they taint what they are designed to preserve and bolster: quality of life. The onus is on state leaders to strike the balance between promoting individual liberty and the general welfare of the citizenry through sound policy.