By: Dave Trabert and Todd Davidson
Word Count: 561
December 15, 2012
In the midst of a dismal recovery where every job counts, one fact stands out: States that tax less achieve better economic performance. Conventional thinking (at least within government) says that low state taxes are dependent upon having access to unusual revenue sources, but that's not it. A state could be awash in oil and gas severance taxes and still have a high tax burden if the government will not exercise restraint.
The secret to having low taxes is controlling spending, and that's exactly what low-tax-burden states do.
States with an income tax spent 42% more per resident in 2011 than the nine states without an income tax. States in the bottom 40 of the Tax Foundation's Business Tax Climate Index (which assesses business, personal, property and other taxes) spent 40% more per resident. In the American Legislative Exchange Council's "Rich States, Poor States" Economic Outlook (based on 15 policy variables), the bottom 40 spent 35% more than the top 10 states.
The data used for these analyses come from the National Association of State Budget Officers. They reflect general-fund spending, which pays for education, Medicaid, prisons, welfare and other primary government functions—and accounts for the vast majority of state tax revenues. The states with no income tax, plus those included in the Tax Foundation and "Rich States, Poor States" rankings (18 in all) are quite diverse: large, small, coastal, inland, bordering Canada and Mexico, densely and sparsely populated.
Every state has public schools, social-service programs, prisons, etc. Some just find ways to provide essentially the same basket of services at lower prices.
Does higher spending deliver higher results? Spending on public education—most states' single largest expenditure—has no relationship to outcomes. The Kansas Policy Institute report, "Removing Barriers to Better Public Education," compared each state's Current Spending Per-Pupil (from the U.S. Census) with their student cohort scores (white, Hispanic, low income, etc.) on the National Assessment of Educational Progress. Among the 20 states with the highest composite scores, there was very little difference between the highest and lowest scores; most variances were in single digits. However, per-pupil spending fluctuated wildly, ranging from a low of $8,507 to a high of $18,126.
States that allow taxpayers and employers to keep more of their earnings are reaping the benefits. States without an income tax have significantly better growth in private sector GDP (59% versus 42%) over the last 10 years. They increased the number of jobs by 4.9% while jobs in the rest of the states declined by 2.6%. States without an income tax gained population (+5.5%) from domestic migration (U.S. residents moving in and out of states) while all other states as a whole lost 1.3% of population between 2000 and 2009.
The 10 states with the highest rank in the State Business Tax Climate Index also dramatically outperform the rest of the country. They win handily on private-sector GDP growth (61% versus 42%), gained 6.1% private jobs while other states declined by 2.8%, and gained 5.5% from domestic migration at the expense of other states, which lost 1.2% between 2000 and 2009.
The margin of victory for Rich States, Poor States' 10 best Economic Outlook states was narrower but the trends are the same—gains in jobs and domestic migration compared to losses, and stronger GDP growth.
The path to superior economic growth and job creation is clear.
Read a version of this commentary in The Wall Street Journal here.