Abolish State Income Taxes; Statistics Show They Retard Economic Growth
Byline: Richard W. Rahn, SPECIAL TO THE WASHINGTON TIMES
Did you know there are nine states that have no state income tax? The non-
income-tax states (see accompanying chart) are geographically and economically diverse, ranging from the state of Washington in the Pacific Northwest, to Texas and Florida in the South, and up to New Hampshire in the Northeast.
Why is it that some of the states with the biggest fiscal problems have the highest individual state income tax rates, such as New York and California, while some of the states with the least fiscal problems have no state income tax at all? High-tax advocates will argue that the high-tax states provide much more and better state services, but the empirical evidence does not support the assertion. On average, schools, health and safety, roads, etc. are no better in states with income taxes than those without income taxes. More importantly, the evidence is very strong that people are moving from high-tax states to lower-tax-rate states - the migration from California to Texas and from New York to Florida being prime examples. (Next year, the combined federal, state and local income tax rate for a citizen of New York City will be well over 50 percent, as contrasted with approximately 38 percent for citizens of Texas and Florida.) If the citizens of California and New York really thought they were getting their money's worth for all of the extra state taxation, they would not be moving to low-tax states.
The obvious question then is: Where is all the extra money from these state income taxes going? It is going primarily to service debt, and to pay for inflated salaries and employee benefits. It is interesting that the high-tax-rate states also, on average, have much higher per capita debt levels than states without income taxes. (Alaska is an outlier because it has its oil reserve to borrow against and actually gives its citizens a dividend each year.)
The biggest additional burden the high-tax states have is unionized government worker contracts. My Cato colleague Chris Edwards notes: Half of all state and local spending - $1.1 trillion out of $2.2 trillion in 2008 - goes toward employee wages and benefits. His study showed that, on average, total hourly compensation for state and local government workers was 45 percent higher than for equivalent private-sector workers. In addition, the government workers are rarely fired - even those with poor job performance. Importantly, the differential was much greater in states where more than half of the state employees were unionized, and these were all in states with state income taxes, with the exception of Washington. High rates of unionization of public employees and high rates of debt go hand in hand. …