One of the study's claims is its prediction that by 2020 a Tennessee income tax would cause state personal income to be nine percent lower than it would otherwise be. To put this in perspective, if Tennessee's personal income had been nine percent lower in 1998 than it actually was, the state's ranking in per-capita personal income would have dropped six places--past four states that currently levy higher personal income taxes than the four percent rate proposed by Tennessee's governor. Thus, NTU predicts a significant negative impact from an income tax that, as proposed, would be lower than the income taxes of 37 of the 41 states with income taxes. Apparently the authors believe that Tennessee's economic health, unlike other states, is hugely dependent on the nature of its tax structure.⁽¹⁾

New Jersey, for example, adopted an income tax in 1976, and since then it has seen its per capita personal income ranking increase from 5^th highest in 1976 to 3^rd highest in 1998.

The NTU report's other principal argument is that per-capita Tennessee state spending will be $434 higher in 2020 if an income tax is adopted. But this is a meaningless prediction. No one questions that state spending will be higher under any of the tax proposals before Tennessee's legislature--because more of the costs of education would be borne by the state. The real question is whether total state and local spending (including spending by local school boards) will go up. The NTU paper chooses to avoid that question.

Certainly the availability of new tax revenues can make more public services possible. Nevertheless, adopting a personal income tax is unlikely to fundamentally change Tennessee's low-public-spending culture. The state ranks 40^th in public spending as a share of personal income. Whether Tennessee's citizens will choose to always be among the lowest spending states in the country remains to be seen. But that choice is independent of the means of raising revenue.

NTU arrives at its unusual predictions by looking at the economic performance and fiscal conduct of nine states that have adopted income taxes since 1967. There are fundamental flaws in this approach, which we now address.

Most states that have adopted income taxes since 1967 have outpaced the rest of the country in terms of real income growth.

NTU's case for the economic wickedness of state income taxes, in a nutshell, runs like this. After World War II, the American economy saw two decades of strong economic growth. But then, between 1967 and 1971, seven states--Michigan, Illinois, Ohio, Pennsylvania, Nebraska, Maine and Rhode Island--adopted income taxes. All but one of these tax changes (Maine's), says NTU, had a hugely negative effect on the national economy. Indeed, in NTU's view, the six frightful new state income taxes quickly led to the OPEC oil embargo, big problems for the American auto and steel industries, stagflation, high interest rates and a sharp drop in productivity growth during the 1970s. Later on, two other states--New Jersey in 1976 and Connecticut in 1991--adopted income taxes. Oddly enough, NTU finds, these two tax changes helped spur the economic booms of the mid-eighties and the nineties. But never mind, NTU concludes, a scorecard of six sour results out of nine cases shows that state income taxes are a disastrous economic policy.

This is, to put it bluntly, a preposterous story.

The NTU report notes that six of the nine states that enacted income taxes since 1967 saw their rate of personal income growth decline after adoption of their income taxes. But the comparison is between growth from 1950 to the year of adoption of the income tax and growth after adoption. This comparison is essentially meaningless.

All six states that NTU alleges performed poorly adopted their income taxes within three years of 1970. But the average national growth rate in total personal income from 1950 through 1970 in constant dollars was 4.1 percent, compared to 2.6 percent from 1970 to 1998. Thus, it's not surprising that most states that adopted a personal income tax had slower growth after 1970 than before, since exactly the same thing happened to most states that did not adopt a personal income tax.

A more meaningful comparison would be to compare growth rates in per capita personal income (in constant dollars) in states that adopted income taxes to both the national average growth rates and to growth rates in states that do not have income taxes. Such a comparison shows the following:

• Of the nine states that have adopted broad-based income taxes since 1967, six have seen higher growth in per capita personal income than the national average from the time they adopted their income taxes through 1998.
• Some of the high-performing income-tax-adopting states include: Connecticut, whose annual growth rate in per-capita personal income since adoption of its income tax has risen by almost half compared to the five years before (a growth rate ranking up from 7^th in the nation to 4^th); New Jersey, whose per-capita personal income growth rate since adoption of its income tax in 1976 has outpaced every state without an income tax except one (New Hampshire); and Nebraska, whose per-capita personal income grew from only 87 percent of the national average before adoption of its income tax to 94 percent by 1998.
• In contrast, of the nine states that still do not have broad-based income taxes, four saw lower growth in per capita personal income from 1991 to 1998 than the national average, while five saw higher growth. Notably, six of the nine states with no income tax had per capita personal incomes below the national average in 1998 (compared to five that were below average in 1991).

There is no evidence that adoption of an income tax leads to increased government spending.

The NTU report claims that in seven of the nine states that enacted income taxes since 1967, state spending has grown at a faster rate since adoption of those income taxes than before adoption. But this is a highly misleading statistic, since it focuses only on state spending rather than total state and local outlays. Many states adopted income taxes for the express purpose of providing local property tax relief. In those states, an increase in state spending would be expected. But total government spending would not go up because combined state and local spending were unchanged.

Of course, a few states have adopted state personal income taxes with the objective of increasing revenues to pay for expanded government services. There is nothing inherently wrong with the citizens of a state choosing to do that--but it doesn't mean Tennessee will also follow that course.

Again, let us compare the experience of states that adopted an income tax since 1967 with those that still have no income tax:

Of the nine states that adopted an income tax since 1967, five increased per capita state and local spending at a faster rate than the national average from 1991 to 1996. The other four states saw lower growth in per capital state and local spending than the national average.

Likewise, of the nine states without an income tax, five increased per capita state and local spending at a faster rate than the national average from 1991 to 1996, while four saw lower growth.

Thus, in the 1990s, there has been little difference in state and local spending growth rates between states that have adopted an income tax and those that have not.⁽²⁾

Conclusion: Junk Economics from NTU

The NTU report distorts data to prove a point that is simply wrong. Forty-one states, with more than 80 percent of the nation's population, have broad-based income taxes. At any given time, some of these states have had strong economic growth and others have performed less well. Likewise, some of the nine states that choose not to impose an income tax have performed well, while some have done poorly. Any attempt to measure whether having a particular type of tax structure helps a state economically can depend heavily on the economic measures used and the time periods selected.

NTU tries to take advantage of this fact to manipulate the data towards its desired conclusion. But the truth is that there is no consistent correlation between a state's economic performance and whether it imposes an income tax--or, more precisely, there is no correlation between poor performance and an income tax.

Nationally, nine of the top ten states with the highest per capita personal incomes have broad-based income taxes. Tennessee ranks 34^th, below 26 states (and the District of Columbia) with broad-based income taxes.

There are states that rely heavily on income taxes, such as North Carolina and Delaware, that have had good economic growth over a long period of time by a variety of measures. States with low or no personal income taxes such as North Dakota, Alaska and Wyoming have done poorly by a number of economic measures.

Since it adopted its personal income tax, effective in 1992, Connecticut has ranked fourth among the states in real per capita personal income growth--one of the best measures of the financial well-being of the citizens of a state. In fact, Connecticut reclaimed its position of having the highest per-capita income in the country in 1996, after falling to second prior to the adoption of its income tax.

This evidence does not prove that adopting a personal income tax would be beneficial to the Tennessee economy--although at least one study less ideologically biased than NTU's has drawn that conclusion about New Hampshire's proposed income tax.⁽³⁾ Rather, the evidence shows that among the 41 states with broad-based personal income taxes, most of them are currently doing quite well.

An honest assessment of the data over long periods of time leads to the conclusion that the existence of a personal income tax does not adversely affect a state's economy in any significant way. This really shouldn't be surprising. After all, there are other factors that are far more likely to affect business decisions, such as labor costs, proximity to markets, and the quality of the work force. The positive effects of an income tax on tax fairness and getting more "bang for the buck" for each dollar of tax imposed are easily measured. In contrast, allegations of purported negative effects do not withstand analysis.

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