The High Cost of Income Taxes

State income taxes are big news these days. First, we published of our study on Governor Richardson’s successful income tax cuts. Today, the Wall Street Journal had an excellent piece by Art Laffer which shows how personal incomes slow economic growth in those states that have adopted them.

As Laffer writes:

Each and every state that introduced an income tax saw its share of total U.S. output decline. Some of the states, like Michigan, Pennsylvania and Ohio, have become fiscal basket cases. Even West Virginia, which was poor to begin with, got relatively poorer after adopting a state income tax.

Richardson’s cuts, as we’ve shown, stimulated growth. Our next Governor should seriously consider eliminating New Mexico’s personal income tax, especially once the economic outlook brightens and needed cuts and reforms are made that will further increase the efficiency and cost-effectiveness of New Mexico government.

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One Reply to “The High Cost of Income Taxes”

  1. Art Laffer is known for Laffer’s Curve, which is an unproven model that seeks to explain the relationship between a given level of taxation and government revenue. It uses a single variable which is unrealistic. In order to validate it all other variables present in an economic system would have to be identified and frozen. Thus there is no proof that his model is valid although Reagan supporters say he proved it when he cut taxes in 1981. Really, so all other variables were frozen then, like interest rates, money supply, the level of employment, the level of government spending, the level of consumer spending, regulatory and compliance burdens, etc. I think not.

    Notice in the referenced article the years being used: 2008 and 2009. There were drastic differences in unemployment between those two years as the financial meltdown unwound and spread beginning in late 2007. Most of these states also happen to have been hit hard by the downfall of the auto and financial sector industries thus pulling down income levels as unemployment surged.

    The article only talks about state income tax, what about the effect of sales, property, excise and personal property taxes and vehicles fees. What’s important is the total level of taxation in a state not just the income tax.

    I do agree that a state can impose too much of a tax burden given there are easy alternatives – other states but again, one has to look at all taxes for a given state.

    I just went to the most recent state unemployment report and notice two states, Nevada and Florida, neither of which have incomes taxes, but have unemployment rates above the national average. Nevada: 14.4%, Florida: 11.7%. I then checked the BEA and see personal income for both states have yet to recover from the levels they were at the beginning of 2008. This can’t be true given the thrust of the article is: states without income taxes grow while states with income taxes don’t.

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