TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, June 27, 2012

NY Times: State Income Tax Cuts Do Not Produce Economic Growth

New York Times Editorial Page Editor's Blog, No Income Tax? No Boost:

This past February, Oklahoma Governor Mary Fallin announced a plan to phase out her state’s income tax over ten years. “We’re going to have the most pro-growth tax system in the region,” she said, according to The Wall Street Journal.  Lawmakers in Kansas and Missouri have also pushed to eliminate their state income taxes this year—convinced, like Ms. Fallin and like the majority of the Republican Party since the 1980s, that the best way to grow is to cut.

Too bad there’s no proof this theory is right. A new study from the Institute on Taxation and Economic Policy shows what liberals have always suspected: States that don’t impose an income tax are not more competitive. No income tax? No boost.

Drawing from the study, Bloomberg News reports that “the nine states with the highest personal income taxes on residents outperformed or kept pace on average with the nine that don’t tax their residents’ incomes.” From 2001 to 2010, per-capita economic output increased an average 8.1% across all 50 states. The nine no-tax states did slightly better: 8.7%. But the nine high-tax states did even better than that: 10.1%.

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Nice try by the NY Times, but their argument is based entirely on manipulation of statistics. So there is "no proof" that low tax policy attracts economic growth? What about the thousands of people moving to Texas where the jobs are?

It is clear that the economies of low tax states such as Texas generally are much better off overall than high tax states such as California, so this liberal study tries to change the subject by focusing on per capita numbers.

Per capita growth rates are irrelevant. What those numbers don't reflect is that places like California are experiencing a net loss of the working class population. Enough of the extremely wealthy stay, however, so this boosts the per capita growth numbers even as the economy shrinks overall. Under the logic of the NY Times editorial board, California would "win" the tax policy argument even if everyone but a few Facebook billionaires fled the state. The real issue is which states' economies are growing overall, not merely per capita.

Posted by: tax guy | Jun 27, 2012 2:55:06 PM

Today I listened to a report about the government having "Food Stamp Parties" to increase particpation in the program, claiming that more people spending food stamps helps the economy. So, why is government hand-out money magically better than the money left in the hands of those who earned it? Of course, The New York Times would never see an inconsistency in that.

Posted by: Woody | Jun 28, 2012 6:04:49 AM

Woody--To answering your (likely rhetorical) question, it is because the marginal propensity to consume (i.e. spend) for the poor is generally considered much higher than that of the rich. If you give food stamp money to the poor, they will be able to buy more flat screen TVs, iPhones, and the like, and they will be more likely to spend the extra money. If you want money spend in the port, you don't give handouts to the frugal captain, but, to the drunk sailors. The money will be spend.

This does not address the desirability of "food stamp parties", as what they money is spent on, and if lack of demand is even the underlying problem, are also relevant questions.

Posted by: Jeremy LaMrouex | Jun 29, 2012 8:06:17 AM