Do states without an income tax really have the strongest economies?

By Tom Swain
Guest Blogger

Governor Jindal wants to do away with state income taxes.  His earlier proposals attempted to raise an equivalent amount of revenue from sales taxes.  He now stresses his desire to end income taxes, but seems willing to let the Legislature find the replacement funding.

Income Tax Sappy

Income Tax Sappy (Photo credit: Wikipedia)

In his speech to the Legislature on Monday, he spoke about wanting people to stay in Louisiana, of wanting people to move here from states like Texas and Florida.  He spoke about members of his own family moving away for better jobs.

Politics ain’t beanbag!  A few bad poll numbers and even your family members leave you.

But would abolishing the state’s income tax cause people to stay or move here from other states?

Interstate migration is complicated.

Think about why people you know moved in or out of this state.  I remember hurricanes Katrina and Rita, the oil patch shutting down in the mid-1980s, all the fluctuations of military base employment, transfers within the chemical industry, as well as the steady brain drain of nearby urban centers like Houston, Dallas, and Atlanta.  I have lived in four different cities, with three moves due to education and one for employment.

People move for lots of reasons, but economic opportunity is only one.

How about a simpler question—would abolishing state income taxes mean more economic growth in Louisiana?

This is also a complicated question, because a state’s economy is so large and complex.  It is hard to tease out the effect of a state’s tax policy on economic growth.  There are no laboratories for macroeconomics.  However, information from 50 different states give some clues about the effects of tax policy on economic growth.

At least economic growth is measurable.  One measure is change in gross domestic product (GDP), the total market value of all goods and services produced for final sale within an economy.  Alternately, GDP is also the total amount paid to owners of the resources used to produce those goods and services.  GDP does not measure quality of life or even job prospects, but it is a good measure of overall economic activity.

A rising GDP is more likely to attract and keep Louisiana citizens.  The Bureau of Economic Analysis (BEA) calculates both U.S. and state GDP results.  It released 2011 state GDP results in June 2012.  Data from 2012 will be released in June 2013.

Most states rely on several different revenues sources, including licenses, fees, and taxes on income, sales, and property.  Different states rely more heavily on some sources than others.  There is much variety in reliance.  The premise behind the governor’s plan is that we can keep our residents in Louisiana by increasing economic growth, which will be accomplished by abolishing income taxes.

According to the Tax Foundation (cited frequently by Tim Barfield, executive counsel for the Louisiana Department of Revenue), seven states do not tax income: Alaska, Wyoming, Texas, Florida, South Dakota, Nevada, and Washington.

In his speech on Monday, Jindal claimed that nine states have no income tax, but he may be including Tennessee and New Hampshire, which tax dividend and interest income.  Four states rely on income taxes for more than 35% of revenues (Maryland, Massachusetts, New York, and Oregon).

On the other hand, four states — Oregon, Delaware, New Hampshire, and Montana — have no general sales taxes.

All states have special sales taxes on items like gasoline, tobacco, and alcohol.  Thirteen rely on sales tax (including special sales taxes) for 40 percent or more of total state and local revenue. They are Texas, New Mexico, Alabama, Mississippi, Arizona, Florida, Hawaii, Louisiana, Arkansas, South Dakota, Tennessee, Nevada, and Washington.

Which states grew the fastest last year?  Did the no-income-tax states outperform others?

As the figures below demonstrate, no clear pattern emerges.

Screen Shot 2013-04-10 at 8.29.11 AM

The top 10 growth rate states did include two with no income tax at all (Texas and Alaska), but also included two of the three states that rely most heavily on income taxes for funding (Oregon and Massachusetts).  Three of the six states that rely the least on sales taxes made the list (Alaska, Oregon, and Massachusetts).

If there is a lesson from last year here, it is not obvious.

Of course, one year is not a long time.  The BEA’s most recent state GDP report included revised results for the past four years.  These included the serious national recession that lasted from 12/07 to 6/09 and the early part of the recovery.  Did state economic growth correspond to high or low reliance on income or sales taxes?

Screen Shot 2013-04-10 at 8.30.11 AM

        Screen Shot 2013-04-10 at 8.32.00 AM

Screen Shot 2013-04-10 at 8.32.00 AM Screen Shot 2013-04-10 at 8.32.14 AM

States with no income taxes had no significant economic growth advantage over states with high income taxes.

States with no sales taxes may have had some advantage over states with high sales taxes, especially when excluding the following high sales tax state:

Screen Shot 2013-04-10 at 8.33.09 AM

Louisiana had one of the highest growth rates of any state, higher than that of any group of states above.

Only Oregon and North Dakota grew faster than Louisiana in 2008-2011.

If taxes improve growth rates, maybe other states should copy ours.

Louisiana’s tax system is a little unusual.   Compared with other states, according to the Tax Foundation, Louisiana is well below the typical state’s reliance on property taxes (20.9% v. 34.8%); it has the highest reliance on sales taxes of any state (54.0% v. 22.4% for the typical state); and, it is below typical reliance on income taxes (16.6% v. 23.9%).

Why did North Dakota and Oregon grow so fast?  North Dakota grew because of an oil-drilling boom and Oregon’s growth came from high-tech durable goods manufacturing like Intel’s chip plant in Hillsboro.  Taxes were probably not a factor, although Oregon is one of the four states without general sales taxes.

Can we improve economic growth in Louisiana by abolishing income taxes?  Higher economic growth did not occur in states without income taxes during the last four years.

This analysis does not prove that abolishing income taxes will not increase our growth rate.  Correlation is not causation.  Nevertheless, the data here suggest that abolishing income taxes will not increase our growth rate.

Finally, do we in Louisiana need to do something to keep our residents from leaving?

The U.S. Census reports that Louisiana has the highest percentage of native residents, 78.8%.  (By contrast, the no-income-tax states have comparable percentages that range from a low of 24.3% for Nevada to a high of 61% for Tennessee.)

There could be many reasons for being number one in this statistic.  Here are two.  Those who are born here stay here and those who move here have children who tend to stay here.  We like it here and that does not need to change.

Tom Swain — attorney, investment adviser, former Advocate columnist, and father of three — teaches economics and business law at South Louisiana Community College.  He can be reached at tomswain@cox.net.

Advertisements
This entry was posted in Louisiana Politics and tagged , , , , . Bookmark the permalink.

2 Responses to Do states without an income tax really have the strongest economies?

  1. Reblogged this on The Daily Kingfish and commented:
    Does it make any sense to eliminate the income tax? Only if you want to bankrupt the state.

    Like

  2. Foley S says:

    Excellent post. There is also a similar article on Bloomberg news showing the higher tax states actually had higher growth rates in the 2000s. Turns out that investing in things like infrastructure and education facilitate higher growth!

    Like

Comments are closed.