Across the country, states like Kansas are looking for ways to become more economically competitive and grow their economy. Fortunately, Kansas appears to be on the right track. Contrary to a recent column by H. Edward Flentje (H. Edward Flentje: State budget high jinks, February 24 2013 Wichita Eagle), the evidence presented in the American Legislative Exchange Council’s economic competiveness guide Rich States, Poor States is well-researched and empirically supported. In fact, the criticisms of the report that Flentje mentioned are severely lacking in research and substance and have been debunked by several economists quite a few times, including the former research vice-president for the San Francisco Federal Reserve Bank. By choosing to rely less on income taxes and more on consumption based taxes (such as the sales tax), Kansas is on firm footing for real economic growth.
Mainstream economists agree that taxes represent a net drag on an economy. Furthermore, not all taxes are equally as bad for an economy. A study done by the Organization for Economic Cooperation and Development ranked taxes in terms of most distortionary and damaging 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.
In just the last 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.
Lowering income taxes and broadening the sales tax base while keeping rates low is a key pillar of pro-growth tax reform. These points are well-documented in Rich States, Poor States while the conclusions from the referenced “Snake Oil” critique are based on measuring a state’s growth in per-capita income from 2007-2011 alone (the worst economic downturn in recent history). This is a deceiving metric because it penalizes states that have a high rate of population growth and rewards states for losing citizens (and their incomes). Low tax states are booming with people and businesses flocking into them, mainly coming as refugees from their high tax counterparts.
For example, California gained no congressional seats in 2010 for the first time in its history; Texas, by contrast, picked up four more seats this census. As people flee high tax states for opportunity and jobs, the population decreases, which can substantially spike the per-capita income of the state. This point is especially relevant when unemployed people leave a state with high taxes to find a job in another (commonly low tax) state. Their $0 of income is no longer calculated into the per-capita measures and neither is their unemployment status. The state they left now has higher per-capita income growth and even a lower unemployment rate, but the state has lost a citizen, a worker, and potential future revenue they would have received, shrinking the overall economy. This is exactly the trend that we are seeing when it comes to migration data and IRS tax return statistics.
Put simply, efforts to lower taxes on personal income and reform the tax code to keep tax rates low while broadening the base are anything but tomfoolery. The evidence is clear that these tax reform efforts help to grow the economic pie for everyone and will help Kansas achieve greater economic prosperity.
For an example of how per-capita statistics can mask underlying trends, see In Kansas, more debunking of the benefit of high taxes. Also, see States that Spend Less, Tax Less — and Grow More.