State Income Tax

Many states are facing major budget deficits this year. So governors in states like California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York, and Oregon have a plan. They want to increase the state income tax on the wealthiest citizens.

For a moment, let’s leave aside whether this is a good or bad idea in terms of tax fairness. Let’s merely focus on whether it will be effective. Arthur Laffer and Stephen Moore argue in a recent column that it will be counter productive. They say: “Here’s the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile. They can leave tax-unfriendly states and move to tax-friendly states.”

I have talked about this in previous commentaries. For example, a survey by United Van Lines found an interesting pattern of movement among the twenty thousand Americans who relocate across state lines each day. In general, they moved from high-tax states to low-tax states.

More recent research by Laffer and Moore using data from Ohio University found that 1,100 people move every day from the nine highest income-tax states such as California, New Jersey, New York, and Ohio to the nine states with no state income tax, including Florida, Nevada, New Hampshire, and Texas. They also found that those no-income tax states created 89 percent more jobs and had 32 percent faster personal income growth than their high-tax counterparts.

But is also important to remember that the fifty states aren’t just competing with each other; they are competing with other countries. The governor of Texas put it this way: “Our state is competing with Germany, France, Japan, and China for business. We’d better have a pro-growth tax system or those American jobs with be out-sourced.” Perhaps he is right. Last year Texas created more new jobs than all other 49 states combined.

I can understand why governors in many states would want to raise taxes when they are facing budget shortfalls, but perhaps they should consider some of the economic facts before they do so. I’m Kerby Anderson, and that’s my point of view.