The article originally appeared in the Durham Herald Sun.
Why do you work?
When reading that question, any one of several answers likely jumped into your mind. But one answer that I’m willing to bet occurred to none of you is: I work to pay taxes.
That noncontroversial assumption goes hand in hand with another self-evident premise: higher taxes create a larger wedge between effort and reward. Workers, investors and business owners – other things being equal – will seek locations where their after-tax rewards are highest.
These premises are confirmed empirically in a recent study titled “Taxes Really Do Matter: Look at the States,” written by Dr. Arthur Laffer, a former economic adviser to President Ronald Reagan, and Stephen Moore, senior economics writer for the Wall Street Journal. The study was sponsored by the Civitas Institute and the Laffer Center for Supply Side Economics at the Texas Public Policy Foundation.
According to several measures in the study, economic growth in the nine states without an income tax far outpaced growth in the nine states with the highest income tax rates. Furthermore, citizens have overwhelmingly demonstrated their preferences for low-tax states by their migration patterns.
Migration patterns are a valuable metric when determining people’s outlook for future prosperity. Simply put, people typically aren’t going to move from one state to another in the belief that they will become worse off.
Some left-wing, pro-tax critics, however, have taken issue with the notion that state taxes matter in terms of economic growth. Indeed, the Institute on Taxation and Economic Policy has attempted to challenge Laffer and Moore’s conclusions, stating “residents of high rate income tax states are actually experiencing economic conditions at least as good, if not better, than those living in states lacking a personal income tax.”
ITEP’s attempts to defend their assertions are unpersuasive, however. For starters, they attempt to explain away the overwhelming migration to no-income tax states as a matter of weather. While it is true that many of the states without an income tax are in warmer climates, the weather excuse doesn’t explain why no-income tax states like New Hampshire, Washington and Tennessee enjoy more robust in-migration and economic growth than neighbor states Vermont, Oregon and Kentucky. It certainly doesn’t account for why balmy California is bleeding residents.
To bolster the claim that “economic conditions” are as good in high-income tax states as in no-income tax states, ITEP relies on data measuring average per capita income growth over the last decade. But such a measure can easily mislead.
For instance, in a high-tax state like West Virginia, struggling lower- and middle-class families have been leaving the state in droves in search of better opportunity elsewhere. This movement, however, will yield growth in the state’s per capita income average as those who remain in the Mountaineer State tend to have above-average income. It quickly becomes clear that growth in per capita income averages does not necessarily reflect a thriving economy.
Conversely, a no-income tax state like Nevada has been attracting large quantities of new residents, many of them lower-income immigrants. While those moving into the state are better off than before, their incomes may still be below average and thus bring per capita income averages down. Nobody in Nevada is made worse off, but the per capita income data misleads critics such as ITEP to faulty conclusions.
The key is to not get bogged down in data, but keep in mind self-evident premises. People don’t migrate between states believing they will find lower living standards. Migration patterns are a valuable measure for economic health. After all, which do you think is the sign of a more prosperous state: one with people lined up at the border trying to get in – or get out?
The issue of whether or not state taxes matter for economic growth will soon be front and center in North Carolina. It is no secret that state legislators are eyeing significant reform to our state tax structure when they return to Raleigh in 2013.
If taxes do indeed matter, such reform will be critical to turn around our state’s economic fortunes. In turn, it is vital that state lawmakers get it right.
If we can agree that people don’t work, invest or create a business in order to pay taxes, then our elected officials should consider the bold, pro-growth measure of eliminating taxes on such productive activities in order to encourage more of it. That means eliminating the personal and corporate income taxes. To replace those revenue streams, the state could expand and slightly increase the much less damaging state sales tax.