Economic Growth: Do State Taxes Matter?

That question was the focus of some recent research by the Martin Institute of Prosperity at U of T.  Their conclusions?

The overwhelming result was that we could find no connection at all between a state’s investment tax burdens and a state’s economic performance. There was no statistical association between state investment tax rates and such key indicators of economic performance as economic output (gross state product) per capita, state income, or wages. Similarly, we found no association between state investment tax burdens and unemployment rates. Likewise, we discerned no association between a state’s investment tax burdens and its levels of human capital or knowledge based and creative class jobs. Nor was there any association between states’ investment tax burdens and the well-being and happiness levels of their citizens. Interestingly enough, there was no association between a state’s political complexion (whether it voted for McCain or Obama in 2008) and its investment tax burdens—in other words, conservative states did not have lower tax rates. . . .

Tax cuts may be an effective political strategy and lowering business and investment taxes may appeal to corporate interests and attract campaign contributions, but they have little relation to state economies. (A recent study I profiled here covers some five decades of data; it concluded that the impact of state taxes on economic growth is “quite variable” and “not always in the expected direction,” while  “expenditure impacts are more consistent.”)  When it comes to building robust, resilient and prosperous economies, more fundamental factors than taxes—like human capital, entrepreneurship, and innovation—come into play.

This is certainly not the last word on the subject.  It doesn’t consider the impact of local taxes (particularly property taxes) on economic activity.  But it does suggest the need to be a bit more skeptical about claims that lower taxes can be a panacea for economically distressed areas.  You can read more about the study here.

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