With jobs front and center in most voters’ minds, politicians seeking to cut or repeal personal income taxes are marketing their proposals as tools for boosting the economy. Recently, some have sought to bolster this claim by asserting that states without income taxes are experiencing a real economic boom, and by promising that the boom can be recreated in any state smart enough to join the no-tax club.
My organization was skeptical of these claims, so we decided to take a closer look at one of the most prominent studies, cited by the governors of Kansas and Oklahoma, among others. It turns out that the study was done by a consulting firm headed by economist Arthur Laffer, perhaps best known as a longtime spokesman of a supply-side economic theory that George H.W. Bush once called “voodoo economics” because of its bizarre insistence that tax cuts often lead to higher revenues.
In kicking the tires on the study’s findings, we paid particular attention to the same 18 states it includes: the nine without income taxes, and the nine with the highest top income tax rates. But while Laffer chose to focus on clumsy aggregate data (more on that later), we took a look at three of the most important and widely recognized measures of economic success: growth in economic output per person, growth in median income levels, and the unemployment rate. The results we found were very different than Laffer’s.
In terms of the first two measures — economic output per person and median income levels — the nine states without income taxes are actually lagging behind the nine states with the highest top income tax rates, and most no-tax states are actually doing worse than the national average. On the third measure, the unemployment rate, it turns out that no-tax states and “high tax rate” states are essentially neck and neck, which will no doubt shock lawmakers promising that an improved job climate will come hot on the heels of income tax repeal.
We also found that on all three measures, some of the states most frequently disparaged by the tax cut true believers — including Maryland, Hawaii and Vermont — managed to best not only no-tax idol Texas but also most of the other eight states “unburdened” by a personal income tax.
So how was Laffer able to reach the opposite conclusion, and in the process generate a wave of assertions that states without income taxes are booming? It turns out that the aggregate numbers he picked — designed to measure the total size of an economy and its workforce — are heavily influenced by shifts in population. These shifts, in turn, are driven by a slew of factors Laffer fails to control for, like the housing market, population density, birth rates, immigration and even climate. And since most no-tax states happen to be located in the growing south and western regions of the country, they tend to have a lot of these factors working in their favor.
Laffer also makes no effort to account for the tremendous natural resource advantages enjoyed by many no-tax states. The two best performing states, according to Laffer, also happen to be the two states most dependent on mining: Alaska and Wyoming. But one would be hard pressed to find a serious analyst in either state willing to attribute their recent growth to the lack of an income tax.
The bottom line is this: No-tax states aren’t booming, and lawmakers should not expect their states’ economies to improve if they join the no-tax or low-tax club. In fact, in terms of the economic factors that matter most to families — income levels, and whether or not they can find a job — the states with the highest top income tax rates are, in most cases, doing better than the no-tax states. If the economy is really the concern of lawmakers railing against the income tax, it’s time for them to put away Arthur Laffer’s tax cut snake oil.