It’s Very Simple, States Should Cut Taxes To Boost Economic Growth

This article original appeared on Forbes.com on November 22, 2013. Read the original here.

There was a strong trend of states cutting taxes this year, with 18 states passing significant tax cuts into law during the 2013 legislative session. With one-third of the United States cutting taxes, it is clear economic growth has become a top priority for states that want to dig out of the dismal economy that followed the recession.

The 2013 tax cuts range from a nearly complete overhaul of a state’s tax code to a few small changes. The year’s biggest tax cut was enacted in North Carolina as part of a comprehensive tax reform package. Ohio also passed major tax relief this year, and the final deal gave Ohio room to claim the biggest year-to-year tax cut enacted in 2013. In the wake of the major tax cuts made this year, three distinct trends can be identified:

People are moving to lower-tax states

Some states choose to fill budget shortfalls by increasing economic growth and expanding the total tax base. Rather than driving up rates on a small number of overburdened taxpayers, these states create an environment where people and businesses can flourish. This attracts more people and businesses to the state, which in turn allows the state to grow its revenue by virtue of having a larger population paying taxes. According to the latest IRS data, Texas, which does not levy a personal income tax, gained almost a million new taxpayers over the past ten years. Florida, another no-income-tax state, gained well over a million taxpayers during that same time period. California by contrast, which has the highest personal income tax rate, lost more than 1.5 million taxpayers over that same period. It is clear low-tax states—many of which are highlighted in the American Legislative Exchange Council’s 2013 State Tax Cut Roundup—are leading the nation in enacting major tax relief measures and will reap the rewards of increased economic growth.

Companies are relocating their businesses to lower-tax states

Recently, Jimmy Johns Sandwiches announced it would be leaving Illinois and heading to Indiana or Texas. Apple recently invested more than $300 million in a new Texas campus. Hertz rental cars moved its headquarters from New Jersey to Florida. Tax and fiscal policy decisions matter to businesses, and the proof is where existing businesses move and where new businesses start.

States without a personal income tax experience more growth

Over the last decade, population in the nine states with no personal income tax grew 150 percent more than their high-tax counterparts. The no-income tax states also saw their gross state product grow 40 percent more than their high-tax counterparts.

While not all tax cuts are created equal, studies from organizations ranging from the Tax Foundation to the Organization for Economic Cooperation and Development agree that taxes on capital and income are far more damaging to an economy than taxes on consumption. All taxes create a barrier between work and reward and tend to negatively affect economic growth at some level, but there is widespread agreement that taxes on income are among the worst for economic growth. State-level economic data from the past 10 years proves this true, and shows that states that do not levy a personal income tax are outperforming their high-tax counterparts in just about every way.

At a time of seemingly endless budget battles, the data shows that states that foster low taxes are far more likely to economically outperform the states that raise taxes to cover budget deficits. Maryland, for example, has increased taxes and fees a total of 40 times since 2007 and yet the state still expects to face major budget shortfalls for years to come.

The data is clear: states with a lower tax burden are able to achieve higher rates of growth in almost every economic category. In the 2013 legislative session, 18 states received this message. If the remaining 32 states desire to stay competitive, it is best they follow their low-tax, pro-growth counterparts.

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One Response to It’s Very Simple, States Should Cut Taxes To Boost Economic Growth

  1. There’s a strong reason why states can’t lower taxes – take a look at what happened in Virginia with the highly controversial (and huge) new transportation funding tax.

    The key problem, as I have been told by legislators making excuses for their votes, is that the federal government mandates more and more state spending, so state budgets are more and more involuntary, as their own programs are crowded out of the funding picture by these federal mandates – Medicaid being the big one that is wrecking state budgets.

    Poop flows downhill, so to speak – recent state tax hikes are largely stealth federal tax hikes, imposed by putting the state budgets in an impossible bind.

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