Lawmakers in a number of states are considering either cutting or eliminating their state personal income taxes to boost economic growth, but a new report argues that states with high income taxes often outperform those without personal income taxes.
The report, from the Institution on Taxation and Economic Policy, evaluated the frequent claim that the nine states without personal income taxes outperform the rest of the country, and their growth can be replicated in any state that abandon its income tax.
“Some have also claimed that the nine states with the highest top income tax rates are experiencing below-average growth,” said ITEP. “The governors of Indiana, Oklahoma, and South Carolina, as well as high-ranking officials pushing for income tax repeal in Louisiana and North Carolina, are just some of the more influential lawmakers that have attempted to frame the debate in this way.”
These points have been widely disseminated by groups such as the American Legislative Exchange Council and Americans for Prosperity, based on an analysis by supply-side economist Arthur Laffer that ITEP considers to be extremely flawed. In a rebuttal last year, ITEP argued that Laffer’s state-by-state comparisons do not reliably explain the impact of tax policy on state economies. ITEP also demonstrated that in reality, the residents of the states that levy income taxes—including residents of those states with the highest top tax rates—are experiencing economic conditions at least as good, if not better, than those living in states lacking a personal income tax. “Only by focusing on blunt aggregate measures of economic growth was Laffer able to purport to show the opposite,” said ITEP.
The new report, which was published Thursday, updates ITEP’s 2012 findings in light of new available data and explains in more detail the group’s problems with Laffer’s analysis.