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High Tax States Have More Economic Growth

A new study from the Institute on Taxation and Economic Policy finds that, contrary to the claims of Republican politicians, states with high income tax rates actually experience more economic growth per capita than states with lower or no state income taxes.

– Four of the nine states without income taxes are actually doing worse than the average state in regards to economic growth per capita: Texas, Tennessee, Florida, and Nevada.

– Five of the nine states without income taxes are doing worse than average in terms of median income growth: New Hampshire, Florida, Tennessee, Alaska, and Nevada.

– Six of the nine states without income taxes had higher than average annual unemployment rates over the last decade: Texas, Florida, Tennessee, Washington, Alaska, and Nevada.

This chart says it all:

hightaxstates

Comments

  1. psweet says

    Looks to me like that chart says that GSP growth increases with tax rates, but that household income growth and unemployment are independent of both tax rates and economic performance.

  2. says

    I wonder how they factored in all the rich people who have official residences in the no-tax states but do most of their living somewhere else?

  3. doublereed says

    What this says to me is that income taxes have very little effect, if any, on the economy. I would be more interested in comparing it to a state-wide spending. Although, most states are forced to balance their budget, so I guess it doesn’t matter. In which case it’s more “government spending => growth” kind of thing.

    I’m surprised GSP can grow yet there’s the same unemployment rates. That confuses me greatly.

  4. magistramarla says

    We have determined that we want to retire in a state that has state taxes.
    We’ve lived in both sorts of states. It is obvious that there is much more poverty and a feeling of hopelessness in a state with no income taxes (usually red states).
    The states with income taxes seem to care more for their most vulnerable citizens – the ill and elderly.
    Also, if I should happen to wind up in a nursing home, I would prefer that the people who hare taking care of me have a living wage and decent benefits, rather than trying to hold down two or three jobs.
    I think that I might have a better chance of being well-cared-for in such a state.
    I have also been concerned about ecology all of my life. I’ve noticed that the states with income taxes seem to be much more willing to use some of those funds to take care of such things as state parks, water sources and the environment in general. I would much rather live in such a place.

  5. raven says

    Same thing with countries.

    A study a few years ago found that the 15 richest countries were mostly the 15 highest taxed countries. There wasn’t much correlation between tax rates and wealth.

    Countries with low tax rates end up Failed. No taxes, no effective central government. The threshold seems to be below 10% of GDP.

    Afghanistan, Somalia, Jamaica, Argentina, Pakistan, Mali, etc. all have low effective tax rates.

  6. matty1 says

    Countries with low tax rates end up Failed. No taxes, no effective central government. The threshold seems to be below 10% of GDP.

    Afghanistan, Somalia, Jamaica, Argentina, Pakistan, Mali, etc. all have low effective tax rates.

    Of course the ‘effective’ tax rate is lowered by not having a functioning government to collect the taxes so it might be hard to disentangle cause and effect there.

    The most interesting related thing I saw was a comparison of the Heritage Foundations ranking of ‘economic freedom’ against tax rates. There was a positive correlation, the higher the taxes the more free the economy – in the view of a bunch of market fundamentalists! I’ll see if I can find a link.

  7. says

    Matty1:

    IIRC, two of the countries that the Heritage Foundation rated as have the most economic freedom were Singapore, which has one of the most authoritarian governments when it comes to personal liberty and Hong Kong, which wasn’t even a democracy when the British were running it.

  8. theguy says

    Many of these states without state income taxes probably rely on more regressive state taxes: higher property taxes or sales taxes.

    While tax cuts for wealthy people don’t stimulate the economy, there might be a stimulative effect from tax cuts for poor people, as poor people usually need to spend their money immediately.

    This link talks about state income taxes and low-income families. State income taxes are supposed to be progressive but in some states hit poor people hard.

    This link shows that states without a state income tax usually raise their sales and property taxes.

    Please excuse my HTML Fail; I haven’t used HTML in a while.

  9. says

    I don’t really understand the quoted text. They all say that about half the states did below/above average in some category. Isn’t this exactly to be expected if something had no effect? 4/9, 5/9, and 6/9 are all about the same for a sample size of 9.

    The graphs are much more meaningful because they average over all 9 states.

  10. frog says

    Places with strong economies and vibrant cultural scenes are more attractive places for wealthy people to live, regardless of taxes. But of course places develop those things by collecting taxes for funding infrastructure (to get employees to work), education (to provide a skilled workforce and educated entrepreneurs), and the arts (to keep everyone, including the wealthy, entertained and mentally stimulated when they aren’t working).

    Feedback loops go both ways.

  11. martinc says

    A friend of mine working in America was considering taking a job here in Australia, but appears unlikely to do so because the massive pay increase would still not be enough to compensate her for the amount of tax dodging she can quite legally do in the USA that she couldn’t do in Australia. More than other equivalent Western countries, tax is only paid lip service in the USA. There seem to be all sorts of loopholes about how you earn your money that changes the rate … as a contractor she is somehow taxed less. In Australia, it’s basically all just counted as income and then you pay tax on the total amount. Tax avoidance and tax cheating are both practiced here, but they just don’t seem anywhere near as effective – or as brazen – as in the USA.

    Tax in the USA is like drug conviction: being wealthy and having a good lawyer gets you out of it. The only people who actually PAY tax are the poor and middle-income earners. Reminds me of Greece.

  12. Ichthyic says

    Many of these states without state income taxes probably rely on more regressive state taxes: higher property taxes or sales taxes.

    …and how many of the states with very low or zero income taxes require a net higher imput of federal money to cover things like necessary roads and fire control and other services?

  13. spamamander, internet amphibian says

    Washington likely doesn’t rely on more federal money, but don’t quote me on that. We do, however, have a pretty nasty sales tax, the base being 6.5% in theory but i have never been in an area that was less than 8%. In some areas with local taxation it reaches 9.5%. There’s also a high gasoline tax (37.5 cents on the gallon), large taxes on things like hotel accommodation, and fees for just about everything. Alcohol (spirits with alcohol content higher than wine or beer) are taxed at 23% + $3.77 per liter, and wine at a differing percentage (in a major wine growing state). Cigarettes are taxed at over $3 a pack. While I don’t have many objections to alcohol and tobacco taxes, the sales tax is pretty harsh for people of low income like me. People living close to the Oregon border generally go there for their tax-free shopping.

  14. theguy says

    Ichthyic @12

    “…and how many of the states with very low or zero income taxes require a net higher imput of federal money to cover things like necessary roads and fire control and other services?”

    Following the second link I gave @8, they give a list of 6 states without income tax:

    South Dakota
    Texas
    Wyoming
    Alaska
    Florida
    Nevada
    New Hampshire*
    Tennessee*
    Washington

    You’re right that many of these states are net recipients of federal money (IIRC, Alaska takes over $2.00 for each dollar they pay in federal taxes). On the other hand, some of these states are wealthier blue states (Nevada, Washington, New Hampshire).

    I understand your point. I would add that many of these states have increased other taxes to compensate for the loss in revenue due to the absence of a state income tax. I’m not an economist, but I would guess that having higher taxes on some forms of business and income and not on others would leave a state vulnerable to recessions and declines/outsourcing of important industries.

    *I also looked up on Wikipedia; New Hampshire and Tennessee tax only dividend and interest income.

  15. Ichthyic says

    On the other hand, some of these states are wealthier blue states (Nevada, Washington, New Hampshire).

    Nevada makes sense, as they have HUGE inputs from the gambling industry, and very cheap power (in fact, they sell it to other states IIRC) due to that giant fucking dam.

    I haven’t a clue about Washington though.

    maybe the same thing? Washington state has a ton of dams too. Do they sell power?

    In any case, I wonder why nobody is pissed off at having to subsidize huge states like Fla and Alaska?

  16. spamamander, internet amphibian says

    I haven’t been able to find hard data on how much electricity the state sells, (my google-fu is weak this morning) but it probably does help quite a bit. there’s no way a state with our population uses this much electricity on its own, especially ranking 49th in power costs:

    The Grand Coulee Dam on Washington’s Columbia River is the largest hydroelectric power producer in the United States, with a total generating capacity of 6,809 megawatts.
    In 2011, Washington was the leading producer of electricity from hydroelectric sources and produced 29 percent of the Nation’s net electricity generation.
    Washington ranked sixth in the Nation in net generation of electricity from wind energy in 2011.
    The State of Washington’s Energy Independence Act requires large electric utilities to obtain 15 percent of their electricity from new renewable energy resources by 2020 and to undertake cost-effective energy conservation.

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