by Howard Stephenson
If Utah wants to make it through its current tough economic times and ensure sustained economic growth, it must avoid tax increases at all costs, according to Dr. Richard Vedder, Ohio University Economist who spoke at the Utah Taxpayers Association’s annual conference on May 17.
“The evidence is overwhelming that you will be a more prosperous people if you allow the private sector lots of freedom and minimize the cost and scope of government and the taxes levied to finance it,” Vedder said. “States that tax their citizens highly have lower rates of economic growth as a consequence of taxation.”
Low-tax vs. High-tax States
Looking over the 40 year period 1957 to 1997, Vedder compared the growth in real per capita income of the 10 highest-taxed states with that of the 10 states with the lowest tax burdens. The growth in the high tax states averaged 115%, compared with 138% in the states with the lowest tax burden. That extra growth in the lower tax states amounts to about $8,000 greater annual income by the end of the period for a typical family of four. Moreover, population growth tends to be greater in states with lower taxes, so total personal income over time rose on average more than twice as much in the low tax states as opposed to high tax states.
Citing specific examples, Vedder explained that neighboring states Kentucky and Tennessee are very much alike with diverse economies. Historically, income per person was somewhat higher in Kentucky. In 1957, the tax burden was lower in Kentucky than in Tennessee. Over time, Kentucky aggressively raised taxes, particularly on income, while Tennessee did not — not even implementing a personal income tax. By 1997, state and local taxes were 25% larger a percent of income in Kentucky compared with Tennessee. Yet Kentucky, which had 5% higher per capita income than Tennessee in 1957, now has 10% lower income per person.
Vedder also compared sun belt states Florida and California. In 1957, income per capita was 40% higher in California than in Florida, but over the next 40 years the differential largely disappeared. While several factors were at work, California raised its tax burden more than Florida did. While the top rate on the state income tax in California reached over 9%, in Florida it remained zero.
Dr. Vedder said the examples abound: Illinois and Ohio, New York and New Jersey, New Hampshire and Vermont, Delaware and Pennsylvania. In each case, the state that raised their tax burden the least over time had the higher rate of growth in income.
Utah an Exception?
“You might say that Utah is an exception to the rule,” Dr. Vedder said, pointing to the fact that Utah has a very high aggregate state and local tax burden, ranking 9th in 1999 in total state and local taxes as a percent of personal income. Yet by most measures, Utah’s economic growth in recent times has exceeded the national average. Vedder said the Utah situation proves that non-tax factors also impact economic growth. Utah is a state that has a fairly well educated population and in modern times knowledge-based skills have commanded a larger premium in labor markets. Utah’s tradition of intact families has produced comparatively lower welfare costs.
Still, taxes matter and Utah’s growth would have been even greater had policymakers moderated taxes.
Utah vs. Colorado
Dr. Vedder compared Utah and Colorado. In 1957, per capita income was 14% higher in Colorado than in Utah. Today, it is more than 34% higher. Typically, over time, income differentials narrow between states as capital migrates into low wavge areas – but that did not happen with Utah compared with Colorado. In 1999, the typical citizen of Colorado paid $14.53 less in state and local taxes ofr each $1,000 earned than the citizen of Utah. For someone making $50,000 a year, that translates into $726. Whereas Utah ranks 9th in overall tax burden, Colorado ranks 41st. Moreover, the two states took divergent paths over time. In 1977, the tax burden was actually significantly higher in Colorado than Utah. Over the next 22 years, the overall tax burden fell rather sharply in Colorado, while it actually rose in Utah. Vedder explained that is a major reason why Colorado is considerably above the national average in income per capita, and Utah is below.
Fiscal 10 Commandments
Dr. Vedder shared 10 fiscal commandments for state governments that will help maintain or restore economic prosperity:
1. Thou shalt keep taxes low.
2. Thou shalt reduce taxes on income and wealth.
3. Thou shalt keep marginal tax rates on income and wealth.
4. Thou shalt not engage in corporate welfare by giveaways to favored investors.
5. Thou shalt limit taxes and/or expenditures constitutionally.
6. Thou shalt be diligent and moderate in collecting and spending rainy day funds.
7. Thou shalt protect employees from extortion of their funds for political purposes..
8. Thou shalt privatize much of current expenditure of funds.
9. Thou shalt provide help to children, not schools, in promoting learning.
10 Thou shalt pay your public servants according to their contribution to prosperity.