Why Sweeping State Tax Cuts Don’t Spur Economic Growth

Conservatives have long wanted state lawmakers to believe that enacting sweeping tax cuts is the key to spurring economic growth. As most legislators across the country grapple with another year of difficult budget choices, controversial economist Arthur Laffer and the American Legislative Exchange Council (ALEC) have been pushing a comparative analysis which aims to prove that the nine states with no state income tax (Alaska, Florida, Tennessee, Washington, Nevada, Texas, South Dakota, New Hampshire and Wyoming) have dramatically outperformed the economies of the nine states with the highest income tax rates (California, Hawaii, Maine, Maryland, New Jersey, New York, Ohio, Oregon, and Vermont).

Thankfully, a new study from the Institute on Taxation and Economic Policy (ITEP), successfully debunks Laffer’s claim and his misleading analysis.

The report, “High Rate” Income Tax States Are Outperforming No-Tax States, shows that according to three commonly recognized indicators of a state’s economy, the so called “high tax” states were actually outperforming their “no tax” counterparts. According to the report:

The nine “high rate” states identified by Laffer have actually seen more economic growth per capita over the last decade than the nine states that fail to levy a broad-based personal income tax. Moreover, while the median family’s income, adjusted for inflation, has declined in most states over the last decade, those declines have been considerably smaller in “high rate” states than in those states lacking an income tax entirely. Finally, the average unemployment rate between 2001 and 2010 has been essentially identical across both types of states.

ITEP has also released a report that discredits the methods Laffer uses to arrive at his conclusions.

This debate over the efficacy of drastic cuts to state revenues coincides with efforts to dramatically reduce personal and corporate income taxes in states across the country. Conservative Governors in Oklahoma and Kansas are even proposing to phase in outright repeal of the state income tax in. A number of other states are considering cuts to the income tax including Idaho, Nebraska, New Jersey, Ohio and Maine.

As lawmakers push ahead with these efforts, often echoing the ‘pro growth’ arguments pedaled by Laffer and groups like ALEC, they would be wise to take heed of the findings in ITEP’s new report, which soundly prove these claims to be misleading and disingenuous.