New From ITEP: States with “High Rate” Income Taxes Are Outperforming No-Tax States

One of the most frequently repeated talking points used by lawmakers seeking to reduce or eliminate state personal income taxes is that doing so will usher in an economic boom.  Recently a number of observers, led by supply-side economist Arthur Laffer, have sought to bolster this argument by claiming that states lacking an income tax have economies that far outperform those in the states with the highest top tax rates.  But a new report from the Institute on Taxation and Economic Policy (ITEP) shows that the truth is exactly the opposite.

Over the last decade, economic output per person has grown significantly faster in the nine states levying a “high rate” income tax than in the nine states without an income tax at all.  And while “real” (inflation adjusted) median income levels have declined in most states, the drop has been much smaller in “high rate” states than in no-tax states.  To top things off, unemployment rates have been virtually identical across both types of states, which would undoubtedly come as a shock to anti-tax lawmakers promising that an improved job climate will come hot on the heels of income tax repeal. 

So where is the myth about booming no-tax states coming from?  The most recent claims are all based on a misleading analysis generated by Arthur Laffer, long-time spokesman of a supply-side economic theory that President George H. W. Bush once called “voodoo economic” because of its bizarre insistence that tax cuts very often lead to higher revenues.

This time around, Laffer ignores important economic measures like median income and unemployment rates in order to focus on aggregate numbers, like total growth in economic output and employment.  But the aggregate numbers are heavily skewed by changes in population, which just so happens to be growing fastest in the south and western regions of the country where most no-tax states are located.  Of course, huge population shifts like the long-running south and westward migration of the U.S. population aren’t determined by tax rates (population density, the housing market, birth rates, immigration, and climate are just a few of many factors that come into play), but this coincidence allows Laffer to suggest that such a relationship exists, even though he provides no evidence for it.

For more detail on what Laffer’s analysis misses, and how “high rate” states truly stack up relative to no-tax states, be sure to read ITEP’s recent report.