Despite Claims, Studies Don’t Agree That State Tax Cuts Boost Growth

June 17, 2013 at 4:52 pm

In recent testimony to the North Carolina legislature supporting tax cuts, the Tax Foundation asserted that “rarely does empirical economic literature speak so strongly in unison as it does about the effect of taxes on economic growth.”  But that assertion is simply false, at least with respect to the literature on the effect of state and local taxes on state economic growth.  There’s no clear research evidence that lower taxes help state economies grow, as our new paper explains.  With tax cut proponents making similar claims in states across the country — and as North Carolina’s Senate considers a damaging tax cut plan this week — it’s important to set the record straight.

We’ve taken a closer look at the Tax Foundation’s recent review of the economic literature on the impact of taxes on economic growth — the basis for its statement to the North Carolina legislature.  (We did not look at the national-level tax studies they cited, although these two surveys show that their claims here are equally suspect.)  We found that:

  • The Tax Foundation mischaracterized or exaggerated the findings of three of the seven articles it cited, and the conclusions of a fourth article it cited are contradicted by a much more recent paper by the exact same author (which the Tax Foundation failed to include in its review).
  • The Tax Foundation omitted from its review at least 20 relevant articles that have been published in major journals or edited compilations since the beginning of 2000, 18 of which either conclude that state and local tax levels have essentially no effect on various measures of state economic performance or suggest that adverse impacts are minimal or limited to particular taxes or time periods.

Some studies by reputable economists find that above-average state and local taxes have a measurable and consistently adverse impact on state economic performance.  However, many equally reputable studies reach the opposite conclusion, and the results of many more are mixed, ambivalent, or show that any adverse impacts are small.  There’s simply no consensus that cutting taxes is a good strategy to boost state economic growth and create jobs.

Click here to read the full paper.

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More About Michael Mazerov

Michael Mazerov

Mazerov joined the Center staff in January, 1998. He is a Senior Fellow with the Center's State Fiscal Project.

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1 Comments Add Yours ↓

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  1. 1

    And, then there’s good old common economic sense. States, unlike the Federal Government do not issue their own fiat currency. They must rely on three sources of revenue, tax collections from citizens and businesses, federal government transfers, and interest earnings on state funds in commercial banks and investment vehicles.

    So now let’s cut state taxes just to see what happens in the real world. We must assume there would be no imposition of an alternative tax shifting the burden up or down the income scale. By definition the public sector shortfall can only be eliminated through borrowing from the commercial sector, or drawing down “rainy day” funds. Assuming all transfers from the Federal Sector remain constant that state’s program recipients will be burden with lower services.

    On the other side of the income tax cut, when income streams are increased, at the margin, consumers will spend/save all or a portion of that increase. However, there is little evidence that that spending generates a net increase in state income growth, since the original income tax forced lower spending in the first instance, with its removal consumers are catching only catching up.

    Over the medium term, however, there could be gains for state coffers assuming again the state was able to continue pre-tax cut benefit payouts without imposing alternative tax increases, sales, excise, etc.

    What 49 states needs to do is create a state owned bank. Keep all the interest earned in the state

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