by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Readers of Investor’s Business Daily encountered over the weekend John Hood’s assessment of North Carolina’s tax reform success story and its relationship to tax reform debates across the country and in Washington, D.C.
Domestically, there is also good news about tax reform from the states.
Legislators in my home state of North Carolina have just voted to junk the state’s multi-rate personal income tax, which topped out at 7.75%, with a flat tax of 5.75%. They also slashed North Carolina’s corporate tax from 6.9% down to as low as 3% (if revenue growth targets are met) and abolished the state’s tax on estates.
Indiana also abolished its death tax and cut its marginal tax rates on personal and corporate income. Wisconsin collapsed tax brackets and sunset its death tax. Kansas trimmed its top income tax rate by a quarter, while New Mexico cut its corporate rate by a fifth.
Not every state has been moving in the right direction. Both Minnesota and California, for example, have jacked up their top income-tax rates. On balance, however, state tax codes have become friendlier to economic growth over time.
From 1993 to 2013, average top marginal rates on personal income have declined, and 17 states now impose a flat tax, a tax tied to federal tax liability, or no income tax at all — all models that reduce compliance cost and its drag on the economy. …
… In the process of designing tax-reform proposals for the 2013 legislative session in North Carolina, I assembled a database of 146 studies published in academic or professional journals from 1992 to 2013 that tested relationships between state policy variables such as tax rates and economic measures such as GDP, employment, personal income and investment flows.
Most studies found negative associations between economic growth and overall state tax burdens, tax progressivity and business or corporate taxation. Liberals like to respond by saying that a better economic strategy for states would be to keep taxes high to fund higher spending on roads, schools, or other state services. But that’s not what the evidence shows.
Of the studies that explored the relationship between state expenditures and state economic growth, most found inconclusive or even negative effects — that is, to the extent higher spending resulted in any measurable improvement in infrastructure or education, it wasn’t enough to offset the negative growth effects of the taxes required to pay for it.
Other good news I’ll offer is that, empirically, the cause of pro-growth tax reform can prevail against long odds. In North Carolina, Wisconsin and other states that have recently enacted tax reform, the cause had to overcome strong opposition from unions, local media and liberal activists.