Tax Reform

A New Dose of Junk Economics

Despite the mountains of credible statistical evidence, the growing scholarly economic consensus, and sheer common sense, another report is released to claim that taxes don’t matter in state economies. The Iowa Policy Project (IPP), a liberal state policy group, and Good Jobs First, a big-labor mouthpiece, have teamed up to release a new report that criticizes Rich States, Poor States—the ALEC-Laffer state economic competitiveness guide. Among other things, the report attacks the core idea of Rich States, Poor States: that incentives matter and people (being rational) will react to those incentives. Public policy can be developed around factual and empirical evidence that reflects what choices a state can make (regardless of weather or natural resources) to help to grow their economy and lead to prosperity. Lower tax and regulatory burdens, along with worker freedom and less debt will generally improve a state’s economy.

The report largely reads as a “how-to” manual for misleading with statistics by cherry-picking data and relying on faulty metrics to create “evidence” that advances a specific high tax, forced union agenda. The report uses, almost exclusively, a snapshot of data from 2007 to 2011 for the basis of its economic measurements. It claims that many of the Rich States, Poor States variables do not correlate to economic growth based on the time period that coincides with the worst economic recession in recent memory, a point unmentioned and seemingly overlooked by the authors. Furthermore, an upcoming academic report from ALEC will demonstrate why the statistical methods used in the IPP report are deeply flawed in theory and in practice.

The strongest claims to support the high tax model are supported by measuring a state’s growth in per-capita income over the narrow time frame. This is a deceiving metric because it penalizes states that have a high rate of population growth and rewards states for losing citizens (and their incomes). Low tax states are booming with people and businesses flocking into them, mainly coming as refugees from their high tax counterparts. Recent census data is clear on this point. For example, California gained no congressional seats in 2010 for the first time in its history; Texas, by contrast, picked up four more seats this census. As people flee high tax states for opportunity and jobs, the population decreases, which can substantially spike the per-capita income of the state. This point is especially relevant when unemployed people leave a state with high taxes to find a job in another (commonly low tax) state. Their $0 of income is no longer calculated into the per-capita measures and neither is their unemployment status. Voila! The state they left now has higher per-capita income growth and even a lower unemployment rate, but the state has lost a citizen, a worker, and potential future revenue they would have received, shrinking the overall economy.

Serious observers will normally consider 10 years, at minimum, when measuring economic trends and will examine total Gross State Product (GSP) growth. As the facts actually demonstrate, over the past 10 years, states without a personal income tax outperformed the highest tax states by a wide margin in total GSP growth, absolute domestic migration, growth in tax revenue, and non-farm payroll employment (job) growth. When discussing these measurements, the authors of the report simply dismiss them as “crude measures.” The thousands of state legislators who read Rich States, Poor States would disagree.

In addition to denying that taxes matter to state economies, the authors also attempt to argue that right-to-work policy has little to no economic effect. A right-to-work law simply means that workers are not required to join a union in order to have a job. After a tirade misrepresenting what this means, the authors claim that “studies have confirmed” that right-to-work status is inconsequential to a state’s economic growth. Meanwhile, back in reality, from 2001 to 2010 the 22 right-to-work states outperformed the 28 forced union states in GSP growth, personal income growth, non-farm payroll employment growth, and in population growth. The right-to-work states also outperformed the national average in each of those categories as well from 2001 to 2010.

While statistical problems and cherry-picked data abound, the report fails to even meet the basic standards for intellectual honesty. The ultimate implication of the report is that states should avoid being like Texas, Utah, or Florida but instead should learn from the models of Illinois, California, and New York. Serious observers of state policy, or even average taxpayers, will realize that these conclusions simply don’t pass the smell test.

Senator Jim Buck is a member of the Indiana State Senate and co-chair of the ALEC Tax and Fiscal Policy Task Force.  Ben Wilterdink is a research analyst with ALEC’s Center for State Fiscal Reform.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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