Cutting state income taxes not a silver bullet for economic growth

Written by: Peter Reichard

It’s the first half of April. Income taxes are in the air. It’s the time when the procrastinators – about one-fourth of us, per the IRS – finally get around to filing income taxes. We’re also on the heels of a session in which the State Legislature trimmed Utah’s income tax rate from 5% to 4.95%, dropping our ranking nationally when it comes to state income taxes. Meanwhile, Utah Foundation’s new report, The Education Tax: Income Taxation in Utah, gives the topic of income taxes its due, including a look at the potential impacts of tax cuts.
Among the report’s key findings: Cutting state income taxes is not a silver bullet for economic growth. While income tax rates matter, various other factors come into play as well.
One common perception holds that the lower a state’s income tax, the more likely a business would be to move there. However, Utah Foundation analyzed a database of the creation of jobs and establishments across the 50 states from 1996 to 2013 and discovered some interesting trends. There are seven states that do not impose any form of income tax. When comparing these seven states to the other 43, they actually had a smaller portion of jobs created from outside companies moving in.
But that’s not to say income tax rates are irrelevant.
Let’s look closer at the extreme case of states that lack income taxes. Seven leave all income alone: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee also generally leave income alone, although they do collect tax on dividends and income from investments.
All nine of these states are on relatively solid ground when it comes to fiscal health, according to a Mercatus Center index. Florida, South Dakota, Wyoming and Tennessee are all in the top 10 for fiscal health. Eight of the nine are in the top half; the exception is Washington state, which Mercatus ranked 26th. In most cases, there appears to be a relationship to state budgets. Florida, Nevada, Texas and New Hampshire are all among the 10 lowest-spending states per capita, according to the Kaiser Family Foundation. South Dakota and Tennessee are nearby in the 13th and 14th spots. Washington is 19th.
That said, Utah – despite its above-average income tax burden – sits in the top 10 for fiscal health. Utah also joins the lowest-spending 10.
By these measures, Utah resembles states that lack income taxes. In terms of economic performance, Utah is in some cases faring better.
Among the states without an income tax, just one – New Hampshire – has a lower unemployment rate than Utah, according to February numbers from the Bureau of Labor Statistics. In fact, Alaska, Nevada and Washington are all among the 10 highest for unemployment.

In terms of GDP growth, the most recent numbers from the Bureau of Economic Analysis show Utah among the top performers, along with Texas, Washington and New Hampshire. Utah is outperforming the other six states with no income tax. South Dakota had the lowest growth in the nation.

Furthermore, some states that forego income tax pick another “poison” to generate revenue. According to the Tax Foundation, Florida, Nevada, Texas, Washington and Tennessee all impose state sales taxes above 6%. (By comparison, the state portion of Utah’s sales tax is 4.7%.) Interestingly, Alaska and New Hampshire get by without any sales tax, and South Dakota and Wyoming have relatively low sales taxes. But according to the Brookings Institution, Alaska and Wyoming depend heavily on mineral revenues, which are subject to wide swings. And New Hampshire has high property tax rates, as does Texas. As Utah Foundation pointed out in a recent report (The Essential Tax: Property Taxation in Utah) our property taxes tend toward the low side.

Finally, it is unclear where the impact of governmental tax policy stops and an entrepreneurial spirit kicks in. One thing is clear: Utah has its share of entrepreneurs. As Utah Foundation’s new report reveals, the overwhelming majority of additional business establishments nationally come from the creation of new establishments, rather than business divisions or relocations: an average of 92% across all states every year. And Utah is second among states in terms of the new jobs created by new establishments and third in job growth overall.

So where it counts economically, Utahns are putting points on the scoreboard – even with an income tax.

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