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Fact Checker: Do states with low income tax see more growth than states with high taxes?
Gazette Fact Checker team
Feb. 7, 2022 6:00 am
The Iowa Statehouse cupola is shown in Des Moines. (The Gazette)
As Iowa Republicans work to broker a bill that would cut state income tax rates, some lawmakers are touting tax reform as a way to compete with other states for workers and make Iowa attractive to a growing workforce.
Sen. Mike Klimesh, R-Spillville
Iowa Sen. Mike Klimesh, R-Spillville, wrote in a Jan. 14 legislative newsletter about legislative proposals to ensure Iowans “keep more of their hard-earned money.” Democrats have criticized these plans as disproportionately benefiting higher wage earners.
Gov. Kim Reynolds has proposed a 4 percent flat tax rate, which would be less than half the current top Iowa income tax rate if approved. The House and Senate have both unveiled different packages that staff estimate would provide $1.7 billion and nearly $2 billion in tax relief, respectively. Those both carry higher price tags than Reynolds’ $1.6 billion proposal.
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The governor’s proposal also calls for a gradual reduction in the corporate tax rate each year revenue surpasses $700 million, until the top rate is 5.5 percent. The Senate proposed a five-year gradual reduction of the top rate from 9.8 percent to 7.8 percent, while the House plan does not make any changes.
“Data has long shown the states with low or no income tax grow more quickly than states with high, punitive tax rates,” Klimesh wrote.
Analysis
Klimesh pointed to articles highlighting population shifts from high income tax states to low or no income tax states to support his claim.
The Wall Street Journal reported this migration, especially among states in the Sun Belt, “has been going on for well over a decade.”
According to the Journal, “Illinois’s population declined by another 141,039 between spring 2020 and this past summer as 151,512 people on net left the state for other states. California lost 300,387 amid a net out-migration of 429,283 residents. The biggest loser — you already know this — was New York, whose population shrunk 365,336 due to an outflow of 406,257 residents.”
The article continues, “Texas added 382,436 new residents, including 211,289 from other states. Florida gained 242,941 in population as 263,958 people from other states flooded in. … Same for Arizona whose population grew by 124,814.” Texas and Florida have no state income tax, while Arizona has income tax rates below 5 percent (the highest is 4.5 percent).
Klimesh also pointed to data from right-leaning organizations such as the American Legislative Exchange Council, Tax Foundation think tank and National Review showing that Americans were on the move to lower-tax states.
Besides tax rates, which can be a “major consideration,” there are a number of other reasons Americans were on the move in 2021, according to a North American Moving Services report. Using neighbor.com survey data of movers, people reported a desire for a lower cost of living, moving closer to family and increased work flexibility as driving factors of their location change. Other key factors were new job opportunities, better schools and more COVID-19 safety in less dense communities.
The report did note that “the states with the highest number of inbound Americans are some of the most tax-friendly states in the U.S. including Arizona with a 1.8 percent (tax rate) and Tennessee with no income tax while South Carolina has a graduated income tax” from 0 to 7 percent.
Of the states the Journal mentioned, it’s worth noting that though Arizona saw a population increase, Illinois, a state that experienced population loss, doesn’t have a much higher income tax rate — its flat rate is 4.95 percent.
To assess similar claims used to justify state income tax cuts, the nonpartisan, not-for-profit Institute on Taxation and Economic Policy in 2017 analyzed 18 states with opposite tax policies: The nine with no personal income taxes, and the nine with the highest marginal personal income tax rates throughout the last decade.
Using Bureau of Economic Analysis data, the institute found that overall and per capita GDP, as well as average incomes, grew faster in states with the higher top income taxes. (These conclusions also held in an analysis with data through 2019.)
The institute noted its study did not control for factors such as “industry mixes, natural resource endowments, tourism advantages, federal spending patterns, geography and climate.” It cautioned against concluding that a state’s tax policy was the primary cause of its economic growth, but suggested its findings cast doubt on claims that tax cuts equate to economic growth.
To the contrary, a 2018 study published in the Quarterly Journal of Economics found that “marginal rate cuts lead to increases in real GDP and declines in unemployment. There is also evidence that the responses are to marginal tax rates rather than average tax rates.”
Some experts acknowledge there is little academic consensus.
A 2015 Brookings Institution study on the relationship between state taxes and growth notes that there are studies available to support every finding: that tax cuts accelerate growth, have no effect or that it’s hard to ascertain their effect.
But according to its study, “the overall impression generated by these results is that state-level economic growth is not closely tied to state-level tax policy. The results are not consistent with the view that cuts in top state income tax rates will automatically or necessarily generate significant impacts, or any impact, on growth. The effects of different taxes — income, corporate, property, and sales — vary dramatically within and across studies.”
Opponents of this theory of trickle-down economics, which suggests that cutting taxes for higher-income earners will promote job creation and investment so that benefits are felt by all, point to Kansas’ failed go at tax cuts.
In 2012 and 2013, Kansas Gov. Sam Brownback implemented tax cuts in an effort to boost the state economy. Lawmakers cut the top rate of the state’s income tax from 6.45 and 6.25 percent to 4.9 percent, allowing these taxpayers to pay the same marginal rate as middle-income earners, and the bottom rate fell from 3.5 to 3 percent.
The Republican-controlled legislature later reversed the cuts as a failure after it led to sluggish growth and shrank revenue, which fueled cuts to government spending on priorities such as education and infrastructure.
Conclusion
While population shifts, in many cases, are drawing residents from higher tax states to lower tax states, experts suggest correlation doesn’t necessarily equate to causation, as people move for a variety of reasons. Some findings support Klimesh’s statement, but others rebut it.
Overall, there is little consensus among economic experts on the relationship between a state’s tax policy and its economic growth, so it’s a stretch to say “data has long shown” tax cuts stimulate the economy. Plus, the case study of Kansas shows tax cuts can put a state economy on a shaky course if not done right.
Research is not as conclusive as Klimesh’s definitive statement — “Data has long shown the states with low or no income tax grow more quickly than states with high, punitive tax rates,” he wrote — and the Kansas example indicates economic growth is not a given when tax cuts are implemented.
He may or may not be correct that tax cuts accelerate growth. But we’re dinging him because this is a hotly debated matter among experts and there’s little certainty tax cuts are a silver bullet for growth as he claimed. Because he left out a big part of the debate, we give the claim a D.
Criteria
The Fact Checker team checks statements made by an Iowa political candidate/officeholder or a national candidate/officeholder about Iowa, or in ads that appear in our market.
Claims must be independently verifiable. We give statements grades from A to F based on accuracy and context.
If you spot a claim you think needs checking, email us at factchecker@thegazette.com.
Members of the Fact Checker team are Elijah Decious, Erin Jordan, Michaela Ramm and Marissa Payne. This Fact Checker was researched and written by Marissa Payne.