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Taxes and the Wealth of States
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20706 |
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Section : |
MODERN THOUGHT
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| Issue
Date : |
9 / 1992 |
4,992 Words |
| Author
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Richard Vedder
Richard Vedder is professor of economics at Ohio University.
He is coauthor with Lowell Gallaway of a forthcoming book Out
of Work: Unemployment and Government in Twentieth-Century
America. |
In the lifetimes of readers of this article, state and local governments in America have grown enormously in size and scope. In the 1980s alone, state and local governmental expenditures more than doubled. While various means have been used to finance this activity, the dominant one is taxation. State and local taxes have grown with government. Before the 1930s, the typical state had neither an income nor a sales tax, whereas today most states have both. Do these increasingly important taxes affect our rate of economic progress? In short, do taxes matter? The answer clearly is "yes," confirmed by a large and growing body of research conducted over the past two decades.
The tax-growth relationship is usually demonstrated by economists through the use of elaborate statistical models, but the same results are obtained through the use of some simple comparisons. Recently, in a study for the American Legislative Council, I looked at a period of roughly one generation, from 1967 to 1990. I compared the ten states in the union with the greatest economic growth (as measured by income per capita) with the ten states possessing the smallest growth rates. As figure 1 shows, the ten states with the greatest growth rates raised their taxes, on average, about 35 percent less than the ten slowest growing states. Alternatively, looking at the ten states with the biggest increase in tax burdens over the same period, the growth rate was fully 20 percent less, on average, than in the ten states with the smallest increase in tax burdens.
The same sort of relationship holds when economic vitality is measured in terms of job growth, population change, or capital movements. It also holds over shorter time horizons. For example, I compared the net migration of population in the ten states with the highest state and local tax burden in fiscal year 1979 over the 1980 to 1988 period with the net migration in the same period with the ten states possessing the lowest tax burden. The ten high-tax states had a net outflow of thirty-six thousand persons. More persons left those states than entered.
This may not seem particularly startling, until one realizes that nearly 5.6 million persons migrated into the United States from other countries in the same period, so the average state gained perhaps one hundred thousand population through new migrants. Not the high-tax states, however.
What about the low-tax states? They gained some 2,970,000 migrants over eight years--over half the national total. Every day (Saturday s, Sunday s, and
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