Lawmakers looking for an excuse to cut their personal income taxes regularly claim that doing so will trigger an economic boom. To support this claim, many cite an analysis by supply-side economist Arthur Laffer that our partner organization, the Institute on Taxation and Economic Policy (ITEP), exposes as deeply flawed.
In States with “High Rate” Income Taxes are Still Outperforming No-Tax States, ITEP explains that Laffer uses cherry-picked data and simplistic comparisons to claim that the nine states without income taxes are outperforming states with “high rate” income taxes. He goes on to suggest that the alleged success of those no-tax states can be easily replicated in any state that simply repeals its own personal income tax.
But ITEP shows that residents living in states with income taxes—including those in states with the highest top tax rates—are experiencing economic conditions as good, if not better, than in the no-tax states. In fact, the states with the highest top income tax rates have seen more economic growth per capita and less decline in their median income level than the nine states that do not tax income. Unemployment rates have been nearly identical across states with and without income taxes.
As ITEP explains, Laffer’s supply-side claims rely on blunt, aggregate measures of economic growth that are closely linked to population changes, and the unsupported assertion that tax policy is a leading force behind those changes. Laffer chooses to omit measures like median income growth and state unemployment rates in his comparisons of states with and without income taxes, even as he cites these very same measures in his other studies, when the story they tell fits his preferred narrative.
Even more fundamentally, Laffer’s work falls far short of academic standards in that it completely excludes non-tax factors that impact state growth, including variables like natural resources and federal military spending (variables that Laffer himself has admitted to be important). In the text of his reports, Laffer concedes that “the drivers of economic growth are many faceted.” And yet when he constructs analyses designed to show the harm of state income taxes, somehow every non-tax “facet” happens to get left out. Of course, more careful academic studies often conclude that income tax cuts have little, if any, impact on state economic growth.
Front Page Photo of Arthur Laffer and Rick Perry via Texas Governor Creative Commons Attribution License 2.0