Many lawmakers in Congress and in statehouses around the country peddle the same supply-side theory about income taxes: the lower the tax, the more the economy will grow. But new research from the Institute on Taxation and Economic Policy reveals this economic approach is failing to deliver in the states. In fact, states with higher income taxes outperformed states with no income tax.
My colleagues and I compared the economic track record of the states that have charted the most radically different courses with their income tax policies, or lack thereof. Specifically, we examined economic growth in the nine states with the highest top income tax rates (averaging 10%), and the nine states with no broad-based personal income tax. What we found undermines claims that income taxes are a drag on growth that must be reduced or eliminated.
Over the last decade, states with the highest top tax rates saw their economies grow by 25.8% on a per-person basis, while those states without income taxes saw growth of just 17.4%. This growth isn’t just about numbers in a spreadsheet or bragging rights. It has translated into an improved quality of life for the residents of states with higher income tax rates. Over this same period, residents of those states saw more rapid growth in take-home pay (disposable personal income per person) and their job prospects, as measured by the official unemployment rate and the ratio of people in their prime working years who have managed to land a job.
To be clear, these types of cross-state comparisons don’t prove that higher income taxes are causing faster growth in the states that have embraced them. But they do cast serious doubt on claims that lowering income taxes is a surefire way to grow the economy.
To hear many lawmakers tell it, nothing is more important than lowering taxes on our nation’s wealthiest “job creators.” But the nine states without income taxes, despite having lower overall tax rates on the wealthy than any of the nation’s other 41 states, are not the shining example of economic success that this line of argument suggests.
Lowering personal income taxes or forgoing such taxes entirely requires difficult tradeoffs that can come at a high cost to the economy. The states without income taxes, for instance, tend to invest less in education—a direct consequence of the low-tax approach that threatens the long-run quality of these states’ workforces.
States without income taxes also tend to rely more heavily on sales and excise taxes, which fall disproportionately on moderate-income families. Balancing the budget on the backs of families who lack a stable financial footing is unsustainable in the long run, and it runs the risk of dampening consumer spending that fuels so much of our nation’s economy.
While some lawmakers are concerned about how their highest-income residents might respond to having to pay a higher tax on their incomes, the reality is that this group isn’t nearly as sensitive to tax policy changes as is often claimed. Wealthy individuals don’t stop working or investing simply because they are required to pay an income tax.
If lightening the tax load for those at the top were key to economic success, then states without income taxes would be trouncing the rest of the country—most of all those states with the highest top tax rates. Instead, these states’ economies are underperforming.
Federal lawmakers are now considering a fundamental overhaul of our nation’s tax code. The proposals and frameworks released thus far adhere to the principle that lower taxes on individuals, especially the richest, are the key to economic growth. Lessons from the states reveal this is not so. We should all be deeply skeptical of any lawmaker’s claim that lowering income taxes is a guaranteed strategy for boosting economic growth.
They are... If some states don't take advantage of that, it's their own damn fault.
I think you know better than to believe that.
Fundamentals of taxation from the feds should be the same in all states.
This also subsidizes the Blue states and their social welfare policies at the expense of the Red states. At least, it would if we didn't just borrow and spend more. Essentially, it allows these Blue state taxpayers to grow the national debt while keeping and increasing their social welfare state policies and sanctuary cities. And the federal debt grows which must be paid eventually by both Blue and Red state taxpayers.
America decided long ago: we will be a social welfare state. We will have social security, Medicare, Medicaid, Unemployment insurance, welfare and universal public education. The vast bulk of the population in the heavily urbanized states decided this long ago, in the 1930s, it has been so ever since, and it will remain so.
Now, some of these things are handled at the federal level, but most at the state and local level. To do them right requires significant taxation, and the bulk of the population, in those urban, heavily populated states, did exactly that.
Holdouts, those who lost the fight in the 1930s, decided not to establish very good social welfare states. Their schools are poor, their unemployment benefits are poor, their roads are poor, they are more prone to violence, their life expectancies are lower.
Americans in general don't want to live like that, and some of that neglect has been mitigated by the federal government partially taking over some of the roles that belonged to the states, so that people in those states retrenched in the past against the general will of the nation can still manage to get Social Security and Medicare and Medicaid and more assistance for their schools than the poor and stingy locals will allow.
The federal deduction for state taxation is the natural result of our political climate.
The states that still refuse to accept the decision of America on the matter of the social welfare state have politicians who would like to unwind that on a national basis. They will fail. The social welfare state is the PURPOSE for which we HAVE the large administrative state. We're not going to do away with it, not ever, because the bulk of us recognize that it is necessary. We also know that those opposed to it will never go away, so we just have to keep beating them, and ruling against their will. Somebody is going to win, and somebody is going to lose. We have been winning for 85 years, and the bulk of the people are with us. The immigrants are with us. People who actually listen to Christ are with us. We really can't lose. All we can do is keep responding to the ruckuses raised by the luddites and boneheads. We have always beaten them, and we always will, because we're better educated than they are, richer than they are, longer lived, healthier and smarter, BECAUSE OF our social welfare states, which educate us better, transport us better, and give us better medical care and less crime and fear.
Our way is better, we're never giving up any of it, and the defeated - if they won't join it and have the benefits for themselves, because they are cussed (and stupid, and self-defeating, and kind of crazy) - will subsidize it through their taxes nevertheless.
Essentially, their tax subsidies are the equivalent of the cigarette tax: you tax the vicious and the dumb to provide assets to, in part, help to mitigate the health consequences of their own stupidity by providing the Medicaid they'll need when they are dying of their habits.
Essentially, it allows these Blue state taxpayers to grow the national debt while keeping and increasing their social welfare state policies and sanctuary cities.
It's called "buying votes",and it a perpetual motion machine,heading downhill to national bankruptcy and riots over food supplies,heat,electricity,and other essentials. By the time it happens there will be 4th and 5th generation welfare recipients that have never paid a house or rent payment in their life,or even bought food or paid for utilities with money they owe.
IF and when the time comes they are cut off and have to sink or swim on their own,they are going to riot in the streets and just take what they want.
Which is pretty much what their future parents are doing today with organized group raids on businesses.
Sooner or later the money for the "Free stuff" is going to run out,and that will be Day One of the Revolution.
