Do High State Taxes Discourage Economic Growth?

By David Shakow

As previewed by my earlier post, State Tax Notes today published an article in which I argued generally that claims that high state taxes discourage economic development may be flawed because they look at statistics selectively and fall prey to the fallacy that correlation implies causation.  In particular, I considered an article by Arthur Laffer which argued that the introduction of income taxes by various states over the past fifty years has in all cases led to a decrease of per capita income when compared to the United States average per capita income in the relevant period.

Starting with the data on per capita income by state published by the Bureau of Economic Analysis of the U.S. Department of Commerce, I determined that, in fact, seven of the eleven states that have introduced an income tax have had an increase in their per capita income when compared to the per capita income of the United States as a whole.  Moreover, while, as Laffer argued, gross state product did decrease for each of those states, the data for gross state product per capita can be read to indicate that the introduction of taxes had no significant effect on a state’s productivity.

The article itself is available for you here:

2010.12.06-STN-Article

And for those readers who would like to see the underlying data, it is available here:

Per Capita Income By State

Population and GDP By State

Unemployment By State

Per Capita Income by State (Inflation-Adjusted)

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