Some policymakers, organizations, and individual economists assert that a consensus exists in the academic literature that state tax cuts boost state economies and that state tax increases harm them, but no such consensus exists.
Policymakers in a number of states are promoting deep cuts in personal income taxes as a prescription for economic growth — an approach that has not worked particularly well in the past and is not supported by the preponderance of the relevant academic literature.
Cutting state personal income taxes not only won’t promote small business growth and job creation, but it is also likely over time to threaten the success of entrepreneurs by taking resources away from critical services like education.
Much of Texas' economic growth results not from its policies but rather from factors that state officials cannot control. And, Texas' economic picture is not entirely rosy.
Attacks on sorely-needed increases in state tax revenues often include the unproven claim that tax hikes will drive large numbers of households — particularly the most affluent — to other states. The same claim also is used to justify new tax cuts. Compelling evidence shows that this claim is false.
State revenues plummet in recessions, just when states can least afford the loss. Some proposals to address this flaw in state tax systems would change the systems’ structure — for instance, by replacing state personal income taxes with sales taxes — but wouldn’t solve the problem and would exacerbate others in state tax systems.
Corporate income tax cuts are unlikely to have a positive impact on a state’s rate of economic growth or the pace at which it generates private-sector jobs.
March 26, 2014
February 18, 2014
September 12, 2013
September 12, 2013
Revised September 5, 2013
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Strengthening state economies and creating jobs — now and into the future — will require sensible, forward-looking state fiscal policies. States need to invest adequately in education, health care, transportation, and workforce development. To do that, they need to generate sufficient revenue, and they need to do so in an equitable and transparent manner. Large tax cuts, such as eliminating income taxes for corporations and high-income people, would impair a state’s ability to remain flexible in the face of changing circumstances. Such plans not only would fail to produce the positive economic results that supporters promise, but also would make it increasingly difficult to pursue the policy options that do create jobs over the short- and long-run.