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“High Rate” Income Tax States Are Outperforming No-Tax States

“High Rate” Income Tax States Are Outperforming No-Tax States

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Published by Progress Missouri
Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP’s mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. Among its many publications on state and local tax policy are Who Pays? A Distributional Analysis of the Tax Systems in All 50 States and The ITEP Guide to Fair State and Local Taxes.
Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP’s mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. Among its many publications on state and local tax policy are Who Pays? A Distributional Analysis of the Tax Systems in All 50 States and The ITEP Guide to Fair State and Local Taxes.

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Published by: Progress Missouri on Jan 26, 2013
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www.itepnet.org
itep@itepnet.org
1616 P Street, NW Suite 200
Washington, DC 20036
 
Tel:
202-299-1066
 
Fax:
202-299-1065
“High Rate” Income Tax States AreOutperforming No-Tax States
Don’t Be Fooled by Junk Economics
February 2012
About ITEP
Founded in 1980, he Insiue on axaion and Economic Policy (IEP) is a non-pro, non-parisan research organizaion, based in Washingon, DC, ha ocuses on ederal and sae ax policy. IEP’s mission is o inorm policymakers and he public o he eecs o curren and proposed ax policies on ax airness, governmen budges, and sound economic policy. Among is many publicaions onsae and local ax policy are
Who Pays? A Disribuional Analysis o he ax Sysems in All 50 Saes
and
Te IEP Guide o Fair Sae and  Local axes
. IEP’s ull body o research is available a www.iepne.org.
 
 Wih he economy lagging, lawmakers seeking o reduce or eliminaesae personal income axes are ouing heir proposals as ools or boosing economic growh. O paricular noe are he governors o Kansas and Oklahoma, boh o whom jusied income ax repeal inheir Sae o he Sae speeches by claiming ha saes no levying personal income axes are ouperorming hose levying heir axes a hehighes raes.
1
Tese claims are based largely on misleading analyses generaed by  Arhur Laer, long-ime spokesman o a supply-side economic heory ha Presiden George H. W. Bush once called “voodoo economics” because o is bizarre insisence ha ax 
cus
very oen lead o
higher 
revenues. Recenly, Laer’s consuling rm has been very successul(wih he help o he American Legislaive Exchange Council, Americans or Prosperiy, and he
Wall Sree Journal’s
ediorial page) inspreading he alking poin ha he nine saes wihou personal incomeaxes have economies ha ar ouperorm hose in he nine saes wihhe highes op ax raes.
2
In realiy, however, residens o “high rae” income ax saes are acually experiencing economic condiions a leas as good, i no beter, hanhose living in saes lacking a personal income ax.
3
 As Figure 1 shows,he nine “high rae” saes idenied by Laer have acually seen more
economic growth per capita
 over he las decade han he nine saesha ail o levy a broad-based personal income ax. Moreover, whilehe
median family’s income
 , adjused or infaion, has declined inmos saes over he las decade, hose declines have been considerably smaller in “high rae” saes han in hose saes lacking an income ax enirely. Finally, he
average unemployment rate
beween 2001 and2010 has been essenially idenical across boh ypes o saes.Te appendix includes sae-specic ndings or each o hese hreemeasures, and reveals ha he economic problems in non-income ax saes aren’ limied o jus Florida and Nevada, as some observers haverecenly claimed.
4
10.1%-0.7%5.7%8.7%-3.5%5.7%
-6%-4%-2%0%2%4%6%8%10%12%
Per Capita Real GSP GrowthReal Median Household Income GrowthAverage Annual Unemployment Rate
Figure 1: Three Measures of Economic Performance, 2001-2010
9 "High Rate" IncomeTax States9 States Without aPersonal Income Tax 
1
Kansas Governor Sam Brownback 
said
ha he wans o “ge us ever closer o he pro-growh saes wih no sae income axes - which are among he counry’s srongeseconomic perormers,while Oklahoma Governor Mary Fallin
cited
an Arhur Laer analysis in atemping o make he case or income ax repeal.
2
“High rae” saes include Caliornia, Hawaii, Maine, Maryland, New Jersey, New York, Ohio, Oregon, and Vermon. Saes wihou a broad-based personal income ax include Alaska, Florida, Nevada, New Hampshire, Souh Dakoa, ennessee, exas, Washingon, and Wyoming. See OCPA and ALME, “Eliminaing he Sae Incomeax in Oklahoma: An Economic Assessmen,” November 2011, pp. 4.
3
Tis repor ocuses on saes wih he highes marginal income ax raes as o January 2011 in order o be consisen wih he relevan Laer analysis, hough we shouldnoe ha his measure provides only a very parial snapsho o wha are in realiy much more complicaed personal income ax codes.
4
Te Hearland ax Rebellion,”
Te Wall Sree Journa
l, February 8, 2012.
Page 1
 
•Sixofninenon-taxstatesaredoingworsethantheaveragestate
 when i comes o economic growh per capia: New Hampshire, Washingon, exas, Florida, ennessee, and Nevada.
•Fiveofninenon-taxstatesaredoingworsethanaverageintermsof
median income growh: exas, Souh Dakoa, Nevada, ennessee,and Alaska.
•Sixofninenon-taxstateshavehigherthanaverageannual
unemploymen raes: Florida, exas, ennessee, Washingon,Nevada, and Alaska.
The Economic Boom Myth
Te Laer analysis disors realiy by ocusing on a number o variablesha are very closely relaed, including populaion growh, oalemploymen growh, and oal growh in economic oupu (GSP).Since a larger populaion brings wih i more demand, i’s only nauralha saes experiencing he ases populaion growh would alsoexperience more growh in he oal number o jobs and oal amoun o economic oupu.Simply pu, he Laer analysis is hugely disored by is ailure oacknowledge he imporance o populaion changes o he variablesi presens. A more sophisicaed way o examining how each sae’sresidens are acually aring is o conrol or populaion growh by looking a
households’ median income
 , he
unemployment rate
 , and
economic output per capita.
Figure 1 and he chars in he Appendix do precisely his, and show ha residens o saes levying a “high rae”income ax are aring a leas as well, and in many cases beter, han heirnon-income ax neighbors. More people, jobs, and economic aciviy cerainly aren’ bad hings, bu income levels and unemploymen raesmater a lo more o he ypical amily, and neiher o hese are areas in which non-income ax saes excel.
Population Growth is Not Determined by Income Tax Laws
Te useulness o he saisics being pushed by Laer is urher limied by he ac ha populaion growh – he driver o he alleged economicsuccess in non-income ax saes – is decidedly no deermined by saeax srucures. According o he U.S. Census, eigheen o he op weny saes in ermso populaion growh beween 2001 and 2010 are locaed in he souhor wesern par o he counry, and seven o hese saes are locaed inhe so-called Sunbel. Demographers have idenied a large numbero reasons or he populaion growh occurring in he souh and wesha are compleely unrelaed o hese saes’ ax srucures. Lowerpopulaion densiy and more accessible suburbs are imporan acors,as are higher birh raes, Hispanic immigraion, and even warmer weaher. Wih his in mind, he growh o saes lacking an income ax is no morehan coincidenal. Six o he nine saes no levying a personal incomeax are locaed in he souh or wesern pars o he counry (eigh o ninei you coun Alaska and Souh Dakoa), and are hereore beneing rom he same regional rends also bolsering growh in saes wihhigher income axes like Oregon, Hawaii, Idaho, and Norh Carolina.In his ligh, i should come as litle surprise ha he sae wihou anincome ax ha experienced he lowes rae o populaion growh was New Hampshire – he only non-income ax sae locaed in henorheasern par o he counry.
Many Non-Income Tax States Enjoy Economic Advantages NotAvailable to Others
Figure 1 showed ha saes wih a “high rae” income ax are perorming a leas as well, i no beter, han heir no-ax counerpars. Whamakes his nding paricularly remarkable is ha saes choosing noo levy an income ax oen do so because hey possess some uniqueeconomic advanage ha allows hem o generae ax revenue hroughnon-radiional means. According o he Bureau o Economic Analysis,hree o he op six saes wih he larges mining secors, relaive o heireconomies, also lack an income ax (Alaska, Wyoming, and exas).Unsurprisingly, serious sae-based analyss in non-income ax saesrequenly poin o naural resources as he cause o heir economicsuccess. For example, in January Alaska’s Deparmen o Laborexplained ha:
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