Growth lags in tax cutting states

Once again, sober analysis shows that tax cuts don’t create prosperity. A report out today looks at how states that cut personal income taxes have fared in the years that follow; the answer is, not that well. Bold promises about tax cuts are usually followed by harsh realities. Here are a few of the key results:

• Job growth slower than the nation in 4 of the 5 largest tax cutting states in recent years. North Carolina is actually the one state that did outperform the nation since the recent tax cuts, but that means that its not the tax cuts that are doing the work. For example, Kansas passed even larger tax cuts that North Carolina did, and it has lagged behind the nation, and behind most of its neighbor states, since then.
• Personal income grew more slowly in 4 of the 5 states that cut personal income taxes the most in the last few years. Even with anemic income growth nationally, most of the states that cut personal income taxes were sub-par performers. This includes North Carolina, where the average worker has seen the value of their wages slip further behind the national average.
• The five states that cut taxes the most aggressively in the 1990s did worse than the rest of the country during the next economic expansion (2000-2007). Some tax cut cheerleaders say we simply need to be patient, that the good times will come, but that not what the data say. States that cut heavily in the 1990’s saw an entire economic cycle come and go without growth taking off.

Of course, none of this is a surprise to people who pay attention to history. Most rigorous studies have found that cutting state taxes has little or no effect on economic growth. Businesses are worried about a long list of costs before they consider the personal income tax rate, so its not a game changer for where they decide to invest. Likewise, people don’t suddenly decide to work harder because they stand to earn a few more cents on the dollar, particularly if they have to pay most of that back in higher sales taxes, worse schools, or deteriorating roads. Cutting personal income taxes in not a magic elixir, but expecting it to cause an economic boom is magical thinking.