Report: States with higher taxes have higher growth and employment

  • The report by the Institute on Taxation and Economic Policy shows states with higher tax rates fare better on multiple key economic indicators.
  • States with the highest rates experienced a per capita GDP growth rate of 25.8% while states with the lowest rates only experienced 17.4%.
  • The poor on average pay higher overall taxes in low tax states than high tax states.
  • The employment rate was also found to be higher in high tax states versus low tax states.

A report by the Institute on Taxation and Economic Policy indicate that states with higher income tax rates outperform states with lower income tax rates on a number of key indicators.

The ITEP compared the 9 states with the highest top marginal income tax rates to those with the 9 lowest from looking at data from 2006 to 2016.

The findings were striking. States with higher personal income tax rates outperformed those with low or no personal income tax rates on a number of key indicators. Both the growth rates of GDP and GDP per capita were higher in the higher tax states.

The trend is also true for rates of growth of personal income, disposable income, and consumption. In each case, residents of higher tax states fared better.

Employment rates were also higher in high tax states. While both groups of states suffered during the Great Recession, high tax states bounced back faster.

The picture was also very different for the rich versus poor. While both groups of states have overall taxes which are regressive, in which the poor shoulder a higher percentage burden, states with no income taxes proved to be the most regressive. In the low tax states, the top 1% of earners on average paid less than a third the rate of their counterparts in high tax states paid.

The results indicate that trickle-down economic policies have not accelerated growth in states where they have been tried, and have actually hindered economic expansion. Another result has been the widening of income inequality. Flat taxes and sales taxes in lieu of personal income taxes have had the effect of pushing the tax burden away from the top 1% of earners onto the poorest fifth.

The ITEP warns that states with low and no income taxes should not “under-appreciate the economic importance of investments in education, infrastructure, and other public services that are funded with income taxes.”

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