Richard Carlson, Jonathan Williams and Ben Wilterdink: Tax policies are not tomfoolery
03/10/2013 12:00 AM
03/08/2013 6:05 PM
Across the country, states like Kansas are looking for ways to become more economically competitive and grow their economy. Contrary to a commentary by H. Edward Flentje (“State budget high jinks,” Feb. 24 Opinion), the evidence presented in the American Legislative Exchange Council’s economic competiveness guide, “Rich States, Poor States,” accurately measures state economic competiveness.
In fact, the criticisms of the report that Flentje mentioned are severely lacking in generally accepted research standards and have been debunked by several leading economists, including the former research vice president for the San Francisco Federal Reserve Bank.
Mainstream economists, small-business owners and taxpayers across Kansas know that taxes have an adverse impact on commerce and economic development. Going beyond just solid intuition, a recent literature review from the Tax Foundation found that of 26 peer-reviewed academic studies on the issue since 1983, only three failed to find a negative impact of taxes on economic growth.
However, not all taxes were created equal. A study done by the Organization for Economic Cooperation and Development ranked taxes in terms of their relative damage to an economy. The study found that taxes on capital and income were the most damaging, while taxes on consumption and property were the least damaging.
That overwhelming academic evidence is augmented by the results from the 50 “laboratories of democracy” across America. In just the past decade, the nine states that avoid a personal income tax greatly outperformed the nine states with the highest personal income-tax rates. The population in states with no income tax has grown 149 percent faster than their high-tax counterparts. While states with high income-tax rates have lost jobs over the past decade, no-income-tax states have seen a healthy 5.4 percent growth in jobs. Even state revenue has grown 82 percent faster in no-income-tax states versus their high-tax counterparts.
What do the critics have to offer? The aforementioned “snake oil” critique is derived by cherry-picking data and then committing several major statistical errors. It measures the growth in state per capita income from 2007 through 2011 (the worst economic slump in recent history) and then has the audacity to suggest low-tax states are struggling economically. Of course, any group of states would look bad during that time period. However, when states are properly measured against one another, the outcome changes dramatically, and the states with competitive tax and labor policies outperform the states with high taxes and big-government policies.
Also, per capita income is a deceiving metric because it penalizes states that have a high rate of population growth and rewards states for losing taxpayers. As taxpayers flee high-tax states for opportunity and jobs, the population decreases, which can substantially spike the per capita income of the state, even though the state’s overall economy has shrunk.
Put simply, efforts to lower taxes on personal income and to reform the tax code to keep tax rates low are anything but tomfoolery, as Flentje suggested. The evidence is clear from academic research and practical experience: Pro-growth tax reform helps to grow the economic pie for everyone and will help Kansas achieve greater economic prosperity.
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