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High-tax states beat no-tax ones

By Kay Bell · Bankrate.com
Tuesday, June 26, 2012
Posted: 3 pm ET

Which states fare better economically, those with high individual income tax rates or those with no personal income taxes?

While it's a close contest, the higher-taxed states win, according to a study of by the the Institute on Taxation and Economic Policy, or ITEP.

The Washington, D.C.-based nonpartisan tax policy research group analyzed the economic performances of the nine states with no income tax on wages and nine states it identified has having high tax rates.

ITEP conducted the study because of the persistent argument, especially in a slow economy, that lowering or eliminating taxes enables a jurisdiction to outperform areas that impose higher taxes.

"These claims are based largely on misleading analyses generated by Arthur Laffer, long-time spokesman of a supply-side economic theory that President George H. W. Bush once called 'voodoo economics' because of its bizarre insistence that tax cuts very often lead to higher revenues." write ITEP researchers in the study.

But when the economic numbers between 2001 and 2010 for the no-tax states of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming and the nine states identified by Laffer as high-tax (California, Hawaii, Maine, Maryland, New Jersey, New York, Ohio, Oregon and Vermont), the results were, if you buy Laffer's argument, surprising.

ITEP found that residents of the high-rate states actually are experiencing economic conditions at least as good, if not better, than those living in states that don't have a personal income tax. In fact, the high-rate states have seen more economic growth per capita over the last decade than the nine no-tax states, a 10.1 percent average increase versus an average growth rate of 8.7 percent for the no-tax states. The national average was 8.1 percent.

On the income front, while the inflation-adjusted median family income amount declined in most states over the last decade, the income drops were considerably smaller in high-rate states than in those states without an income tax.

And that political bugaboo of unemployment? The average unemployment rate between 2001 and 2010 was essentially identical across both types of states.

Parsing population factors

"Simply put," says the ITEP report, "the Laffer analysis is hugely distorted by its failure to acknowledge the importance of population changes to the variables it presents."

Population growth under the Laffer theory is supposed to drive economic success in nonincome-tax states. And while it's true that a lot of folks are attracted to states without a personal income tax -- I've lived in two of them, Florida for six years before returning home to Texas, and I've seen the influxes personally -- population growth is not determined solely by state tax structures.

According to the U.S. Census, the South and West are home to 18 of the top 20 states that showed significant  population growth between 2001 and 2010. Seven more states with growing populations are in the Sun Belt. Anybody who's lived in the northern part of the country with its cold, cold winters (almost 20 years in Maryland for me before migrating south) knows that while no taxes are nice, not having to shovel snow is even better!

So when you consider that 6 of the 9 states that don't collect a personal income tax are located in the southern or western parts of the country, then you can't give all the credit for the new residents to their tax structures.

That said, not having to file a state tax return every spring is nice. But don't deceive yourself that such a system is an economic panacea.

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1 Comment
Jay
July 10, 2012 at 2:10 pm

I am not sure I agree with this article. Business tend to stay where the opportunity exists and where resources ( people or other are easily available).

Taking that to mean higher taxes have no effect on economic situation is quite frankly, a stretch by imagination. Case in point, take VA/MD. MD recently increased the highest personal income tax rate to 8.75, where as in virginia, it is still at around 6%.
There has been huge growth in population in VA, compared to MD ( suburbs of DC). Short term rate increases/reductions dont matter. What matters is if the difference in tax rate stay on for longer. It has a pronounced effect on population growth -- Longer term.