How Changes in State & Local Tax Burdens Affect Growth in Per Capita Income
A new report seems to support the spending philosophy of liberal governors
A new study by Tulane's James Alm and Janet Rogers of Nevada's Department of Budget and Planning... takes a close look at the effects of tax and spending policies at the state level. Entitled "Do State Fiscal Policies Affect State Economic Growth?", it examines 50 years of data (from 1947 to 1997), tracking the effects of state tax policies, spending policies, and political orientation on economic growth....
There are two major take-aways. First, a "state's fiscal policies have a measurable relationship with per capita income growth, although not always in the expected direction." Tax impacts, they report, are "quite variable"; "expenditure impacts are more consistent."
Second, they find "moderately strong evidence" that a "state's political orientation, as indicated by whether the governor is Republican or Democrat, whether the state has enacted tax and expenditure limitation legislation, and whether the state frequently elects a governor of the same party as the incumbent, have consistent, measurable, and significant effects on economic growth." And then they drop their bombshell: "Having a Republican governor," they conclude, "is associated with lower rates of growth." They qualify their conclusions slightly--but only slightly--noting that past measurement errors may have introduced some distortions into the record.
Taken together, these findings seem to support the spending orientation favored by liberals and pose a rather stark challenge to Republican governors who are embracing austerity."
Taxes, Spending and Politics of Growth
Also:
How Changes in State & Local Tax Burdens Affect Growth in Per Capita Income
Excerpt:
"...from 1977 to 1979, most states were in tax cutting mode. The 17 states that cut taxes the most are placed in the “biggest tax cutters” group, the next 17 states are placed in the “medium tax cutters” group, and the 17 remaining states (including the D of C) are placed in the “smallest tax cutting” group. Now, the biggest tax cutters produced a median annualized growth rate in per capita income from 1979 to 1985 of 7.8%. By contrast, the median tax cutters from 1977 to 1979 enjoyed a median annualized growth of per capita income from 1979 to 1985 of 7.9%. On the other hand, the smallest tax cutters produced a median growth in per capita income of 8.3% from 1979 to 1985. Thus, for the 1977 year, we rank the smallest tax cutters as first, the median tax cutters as second, and the biggest tax cutters as third.
The following graph summarizes our results for all the years available:
"The table is interpreted as follows: the smallest tax cutters (i.e., those who cut taxes the least or raised them the most in any given year) produced the fastest economic growth about 42% of the time, second about 29% of the time, and third 29% of the time. By contrast, the middle group came in first in one third of all occasions. The ”tax cuttingest” group came in first place a mere quarter of the time; in half of all years, it came in last place.
Many conclusions are reasonable from this. However, concluding that states that cut taxes have produced the fastest growth rate in per capita income is not one of them. After all, in general, the states that cut tax burdens in a two year period have, as often as not, turned in the worst performance when it comes to growth in per capita income in the following six years.
Tying everything back to the work I’ve been showing in recent months (and which supports our findings in Presimetrics) – looking at data over the length of Presidential administrations since 1929 (when national accounts data became available), those Presidents that cut tax burdens in the early years tended to have worse real economic performance in later years than those that raised tax burdens. Similarly cutting tax burdens during or just following a recession produces slower, shorter recoveries. Now we find that cutting tax burdens isn’t the prescription at the state level either.
I’ll repeat something I’ve noted before – any economic theory for which just about every observation is a special case is wrong."
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