State Tax Cuts Indicate Emphasis on Economic Growth

The 2013 legislative session saw a strong trend of states cutting various taxes, as 18 states passed net tax cuts into law. When one-third of the country cuts taxes, it is clear economic growth is a top priority for states digging out of a dismal economy. The cuts range from a nearly complete overhaul of a state’s tax code to a few small changes. North Carolina enacted the year’s biggest tax cut as part of a comprehensive reform package. The measures will be phased in over a period of several years, with taxes cut by $500 million during the first two years, and the measure will continue to cut more than $650 million per year by the 2017-2018 fiscal year. Without question,

North Carolina’s reforms are among the most significant tax relief any state has passed in the last decade.

At a time of seemingly endless budget battles, states have divided themselves into two distinct categories for solving funding issues:

  • One group tends to reflexively raise taxes to cover budget shortfalls, which rarely results in achieving the revenues needed to fill the gaps. For example, Maryland has increased taxes and fees a total of 40 times since 2007 but still expects to face major budget shortfalls for years to come.
  • The second group fills budget shortfalls by increasing economic growth and expanding the total tax base. Rather than drive up rates on a small number of overburdened taxpayers, these states create an environment where people and businesses flourish, which attracts more population and businesses to the state and allows it to grow revenue by virtue of having a larger population paying taxes.

It is this second group of states—many of which are highlighted in the 2013 State Tax Cut Roundup—that leads the nation in enacting major tax relief measures and reaping the rewards of increased economic growth. Jimmy Johns Sandwiches announced it would be leaving Illinois and heading to Indiana or Texas, while Hertz rental cars moved its headquarters from New Jersey to Florida. Tax and fiscal policy decisions matter to businesses and the proof lies where old businesses move and new businesses start.

While not all tax cuts are created equal, studies from organizations ranging from the Tax Foundation to the Organization for Economic Cooperation and Development agree that taxes on capital and income are far more damaging to an economy than taxes on consumption. All taxes create a barrier between work and reward and tend to negatively affect economic growth at some level, but there is widespread agreement that taxes on income are among the worst for economic growth. Indeed, state-level economic data from the past 10 years proves this true.

The Rich States, Poor States annual report tracks the economic data and ranks the states’ economic outlook based on 15 important policy variables. Over the last decade, population in the nine states with no personal income tax grew 150 percent more than their high-tax counterparts. The no income tax states also saw their gross state product grow 40 percent more than their high-tax counterparts.

The data is clear: states with a lower tax burden are able to achieve higher rates of growth in almost every economic category. In the 2013 legislative session, 18 states received this message loud and clear. If the remaining 32 states desire to stay competitive, it is best they follow their low-tax, pro-growth counterparts.

In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure…

+ Cronyism In Depth