Zeros and Soakers

Steve gave me a copy of Laffer, Moore and Willliams book, Rich States, Poor States.  Bombshell conclusions!  Laffer is the economist who first studied Sweden and concluded that there was a relative maximum at which the state can tax.  Tax more than that and revenues actually fall because people are hiding their incomes and avoiding taxes.  He then applied this to USA and found that during the Eisenhower Administration, taxes reached this max and that by cutting taxes, Kennedy actually achieved higher revenues.  This Supply Side Theory then became the hallmark of Reagan’s revival of Carterville, Thatcher’s revival of the British Disease and the Pacific Tigers’ (Japan to Australia) fabulous success .  Steve Moore is the well-known guest on FOX business channel and senior economist for Wall Street Journal.  Jonathan Williams worked for the non-partisan Tax Foundation for years and is now director for Center for State Fiscal Reform.

These guys researched the matter of ‘what makes a state prosper’ and considered many things.  For example, they looked at right-to-work states.  Turns out that right-to-work states are slightly more prosperous than Union shop states but not significantly.  This either overturns older research in the 70’s or maybe it is simply because only about 10% of people are still unionized today, down from 42% in the fifties. State indebtedness also somewhat correlates, but not strongly.  They began looking at taxation because tax incentives matter to people.  People don’t just work for the purpose of giving it all to the government.  They found there was no clear link between sales tax rates and economic performance.  Similar results were found for property taxes. But when they studied personal income and corporate taxes, the explosions of correlation began. 

Now just because you have correlation between two things, doesn’t mean you have cause.  Just because you have poor students in school that are malnourished, doesn’t mean that food makes brainpower or that all the skinny girls are dumb.  It may mean that the true cause of poor school performance is uncaring parents sending kids to school without breakfast and not caring if the kid gets an education either.  So when you deal with economics, which can’t do double-blind testing, you rely on duration and broad scope for proof.  If it has been going on for a long time in a variety of circumstances, then correlation is likely causal proof.

So here’s what they found.  9 states with no personal income taxes were compared with the 9 states with highest income taxes and highest overall taxes.  In every category of growth, the 9 Zeros outperformed the 9 Soakers—Gross State Product growth, employment growth, population growth and tax revenue growth.  Moreover virtually ALL the Zeros did better than the Soakers.  Two stunning statistics:  In employment growth, all nine Zero Taxers outdid the 9 high tax states. (Performance of each Zero was better than best performance of ANY high tax state.) If this upcoming election is going to be about jobs, put that in your pipe and smoke it! Tax revenue growth to the state was better in 8 of 9 Zero taxers than in the average of high-tax states.  Think of that.  If you are a liberal, progressive, love-big-government leftist, why wouldn’t you go for revenue growth for your state that comes with zero personal income tax policy?  You would only oppose it if you are more concerned with government control over people’s lives via high tax rates, than with actual government largess. 

The zero taxers come from all around the country—Alaska, Texas, New Hampshire, South Dakota, Nevada, Tennesee—and so do the high taxers—California, Oregon, Hawaii, New York, New Jersey, Ohio, Maryland.   The only regional skew is that high tax states do not have any representatives from the deep South.  Hence some liberals have cried foul saying that climate, not low taxes, is the reason for all the growth of the Zeros.  That’s amusing.  So people are fleeing the paradise states of California and Hawaii and moving to Texas, Florida, and Arizona which have a summer fit only for mad dogs and Englishmen?  Or Alaska? Give me a break! 

And this growth result has been going on since at least 1971.  Among the Zero states, personal incomes have grown about 45% per decade vs. 25% in Soaker States.  11 states have initiated an income tax since 1961.  ALL eleven have shrunk as a percentage of the US economy since.  ALL eleven have shrunk in population as a % of US.

The relationship between corporate taxation and economic growth behaves in much the same way though less pronounced.  The 8 lowest vs. 8 highest corporate tax states has 52% vs. 43% GSP
 growth.  (Pers. Inc. Tax comparison of 9 Zeros vs. Soakers is 59% vs. 42% for example.) And the authors run possible groups excluding heavy mineral-rich states like WY and AK through all these calculations to see if reliance on severance taxes makes an effect.  It is not much.

The upshot is that personal income taxes is the most likely target to reform.  This might surprise some pro-business Republicans who would prefer to lower corporate tax rates.  It might surprise some Democrats who would like nothing better than to tax the rich more.  And it probably surprises the conventional wisdom that since taxes are miserable, states should spread the misery around by taxing everything possible.  Texas and Florida really do know what they are doing.  California, Hawaii and New York are great states with many advantages but taxwise they are fools.  We will have to watch what happens to Wisconsin and New Jersey under new management.  But most of all it tells Kansas and Oklahoma  to press forward with Zero Tax reforms.  To create a corridor of states from South Dakota to Texas where taxes are low would not just transform these states individually.  It would make a free enterprise zone where incoming businesses could choose their state of preference based on other factors while staying in the tax-free zone.  That is, the “French Quarter Effect”—people go to the French Quarter of New Orleans to dine, not because of a single restaurant, but because there is an entire zone of fine dining.

So then, could our state use a better economy, more jobs and greater revenue?