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Willisms

« Wednesday Caption Contest: Part 33. | WILLisms.com | Trivia Tidbit Of The Day: Part 232 -- Oil Company Profits. »

Trivia Tidbit Of The Day: Part 231 -- Lower Taxes, Stronger Economy.

States Benefit From Lower State & Local Taxes-

In earlier Trivia Tidbits (#207: "Lower Taxes, Higher Growth" & #208: "State Income Tax Comparisons), WILLisms.com examined the policy ramifications of state income taxes, or the lack thereof.

The conclusions: states that lacked an income tax saw stronger economic growth, stronger personal income growth, stronger population growth, and stronger job growth, than states with the highest income tax rates. States without income taxes also, shockingly enough (not!), had fewer budget problems than the states with the highest income taxes.

But income taxes are just one part of the tax equation. Let's now turn to a comparison of the ten highest taxed states and the ten lowest taxed states. The Texas Public Policy Foundation crunched the numbers (.pdf), taking income taxes, sales taxes, property taxes, gasoline taxes, alcohol taxes, and all the other state and local taxes to determine the overall tax burden in each state.

Here are the numbers, including the superlative states, those with the lowest and highest state and local tax burdens (.pdf):

stateandlocaltaxrevenues.gif

From 1994 to 2004, there is a stark contrast in the economic performances between these groups of states. Lower tax burden = better economic performance. Higher tax burden = worse economic performance.

Relative to the average of the 10 states with the highest total state and local tax burden, the average of the 10 lowest taxed states showed:

♦ Faster growth of gross state output (71.7% vs. 62.4%);

♦ Greater personal income growth (70.2% vs. 60.4%);

♦ A much greater increase in total population (12.8% vs. 6.4%), including a net inflow of residents into the 10 low-tax states from other states (3.3% of total population) vs. a net outflow of residents from the 10 high-tax states to other states (2.5% of total population);

♦ Much more rapid job creation (16.9% vs. 12.6%);

♦ Only a slightly higher personal income per capita growth (51.0% vs. 50.7%); and

♦ A slightly higher unemployment rate (5.0% vs. 4.7%).

Viewed another way (.pdf):

taxesandgrowth.gif

We're lucky in America to have 50+ somewhat distinct laboratories in which to compare and contrast actual ideas and policies. Ironically enough, it was once liberals who appreciated that states could be labs for economic and social experimentation. Today, it is (usually, but not always) liberals who seek standardization (via higher taxes and bigger, more powerful central government in Washington). It is now liberals who complain that federal tax/budget cuts mean that states must pick up an unfair proportion of the slack. This was even a common (erroneous, Krugman-esque) theme of the Kerry campaign during the 2004 presidential race:

"President Bush's tax cuts exacerbated the state and local fiscal crisis, forcing them to take steps like raising college tuition and property taxes while cutting health care for children.

This has resulted in a stealth tax increase -- and helped contract the economy."

If only it worked that way. If only states were true independent laboratories of fiscal policy. Federal taxes would be extremely low, liberal states could set their taxes at whatever levels they desire and offer lavish welfare and entitlement programs, and conservative states could keep their taxes relatively low and keep government spending low, accordingly.

Businesses, investors, and individuals themselves could then vote with their feet. States with fiscally-sound policies would flourish; states with untenable German-style fiscal policies would languish. The average American would then need to make a choice. It's difficult to imagine that pro-growth states wouldn't win that policy battle. After a few years or so, the odds are that, upon evaluating the stark contrasts between the high tax and low tax states, Americans would vote with their feet en masse.

And vote with their feet many Americans have done (.pdf):

taxesandpopulationgrowth.gif

Let the best policies win, in other words. We still do have this scenario in America to some degree, but the increasing "Washington, DC-ization" of government is diminishing the opportunity to test policies head-to-head.

And don't get me wrong, I don't want high tax states-- or the people in them-- to suffer. I am not advocating the destruction of states that make poor fiscal decisions, nor am I suggesting that we eliminate the federal government entirely. That's not the point.

Here is what would happen under the "50 state lab" concept:

After seeing their populations flee to states with more efficient tax-and-spend circumstances (which are flourishing in every which way), states with poor fiscal policies would quickly change their ways. In other words, state and local governments would form a kind of market. The best policies would rise to the top.

State and local governments with poor policies would copy "what works" to prevent getting left behind. We all know what works. We have pretty clear evidence of what works right in front of us.

Sure, people choose where to live based on more than economic policies and conditions. People may like the beach, or the desert, or the mountains. People may have deep roots in-- or connections to-- a particular part of the country. And some smaller states (Rhode Island, Connecticut, Delaware) don't exactly have a lot of room to physically grow, while larger states (Texas, Nevada, Arizona) do (and thus benefit). There are many reasons people choose to live where they do, and there are many reasons for growth or lack thereof.

But the evidence before us today indicates that the United States is a highly mobile society, and many Americans are willing to relocate wherever opportunities abound. And people are leaving states with high tax burdens and relocating in states with low tax burdens.

Just take a gander at the net flows of migration in and out of states from 1994 to 2004 (.pdf):

americansfeetvoting.gif

The green arrows indicate a negative net migration to other states. Notice that states with higher tax burdens are more likely to have more people move away than move in.

And it's not necessarily a Republican/Democrat dichotomy, but the trend is pretty clear. States with lower tax burdens are gaining people at the expense of states with higher tax burdens.

Imagine how these numbers might look under a "50 state lab" scenario. One has to believe that the real-world consequences of high or low taxes would become even more apparent than they already are.

Source:
Texas Public Policy Foundation (.pdf).


-------------------------------------

Previous Trivia Tidbit: Texas Economy.

Posted by Will Franklin · 30 November 2005 01:33 PM

Comments

Outstanding job.

Posted by: Tom Blumer at November 30, 2005 03:49 PM

This is all potent stuff, but it should be noted that two of the no-income-tax states, Nevada and Alaska, have alternative sources of revenue that are not easily replicated in the other "state laboratories."

Which in no way lessens the argument that lower taxes are better, all else equal. I'm just saying that one shouldn't fault states for not doing the impossible (e.g., suddenly finding lots of oil).

Posted by: KipEsquire at November 30, 2005 04:24 PM

Great post, Will. I've been arguing this point with peers and academics for a long time. If we ran states more like businesses -- with incentives for "real" businesses and the population -- it only makes sense that those states are going to do well.

Try and convince a liberal of that, though.

Posted by: Cullen at December 1, 2005 08:08 AM

Amazing that California is only one of the pack not in the highest tax group. Are you sure that you haven't missed something?

Posted by: laxpat at December 1, 2005 09:41 AM

How can Wyoming with no income tax, 4-6% sales tax, one of the lowest gas taxes really be the 3rd highest tax state?

Posted by: wyguy at December 1, 2005 01:59 PM

Probably high property taxes. That's a big hurt for a lot of states.

Posted by: Will Franklin at December 1, 2005 02:01 PM

Very interesting.

It may interest you that Switzerland (of which the structure pretty much resembles the one in the U.S.), being divided in 26 "States" (we call them cantons) has a very healthy tax competition between the cantons.

In Switzerland, a big part of personal and corporate income taxes are levied by the cantons (as far as I know, their part is much higher than the US' State-taxes). Therefore, the cantons' different and independent tax policies are very decisive and influential. As a result, we have overall much lower tax burdens than the EU. Since the Europeans (EU, but also OECD) don't like this idea of having their tax base "eroded" by swiss rates, they invented the concept of "harmful" tax competition. E.g., if you have too low a rate, you are "stealing" money from your fellow european brother....

Still wonder why many swiss just don't wnat to join that club...? ;)

Posted by: sisyphos at December 1, 2005 06:26 PM