Higher Taxes, Lower Growth! Who Would Have Known?
New research from the National Foundation for American Policy “finds U.S. metro areas with lower taxes have higher employment growth and income growth, attract more residents,” according to the press release (requires Adobe) introducing the study. The author of the study (requires Adobe) is Dean Stansel, an economics professor at Florida Gulf Coast University in Ft. Myers, FL.
The analysis uses data from all 381 U.S. metropolitan areas, consisting of 352 metropolitan statistical areas and 29 metropolitan divisions. In a nutshell, the report shows:
“metropolitan areas with lower taxes exhibit higher employment growth, faster population growth, and greater increases in real personal income than areas with a higher tax burden. These findings are particularly relevant at a time when many states and cities are proposing to raise taxes to address short and long-term budget problems. This research found areas with higher taxes had lower employment growth, smaller personal income gains and slower growth of population.”
Several of the study’s findings include:
- Employment growth between 2000-2006 was 54 percent higher in the 50 metropolitan areas with the lowest tax burden than in the 50 highest-tax metro areas (measuring the tax burden as state and local taxes as a percent of personal income in 1997 for all 381 metropolitan areas).
- Real personal income growth was 80 percent higher between 2000 and 2006 in the 50 areas with the lowest state and local tax burden (as a percent of personal income in 1997) than in the 50 highest-tax metro areas.
- In the 50 lowest-tax areas, population growth at 8.6 percent (between 2000 and 2007) was more than three times higher than in high-tax metro areas (2.6 percent).
- The results suggest a clear negative relationship between state and local tax burdens and local economic growth.
- The tax burden was nearly 50 percent higher in the 50 highest-tax areas than in the 50 lowest tax areas (13.1 percent of income vs. 8.8 percent of income).
What explains the higher employment growth or higher growth in personal income? According to Stansel:
“Taxes remove money from the hands of private individuals and place it in the hands of government agencies. Those private individuals have a stronger incentive to use that money productively because they directly bear the cost of not doing so. In contrast, government employees do not as directly (if at all) bear the cost of wasteful spending, nor can they legally reap the benefits of keeping those costs low. That’s not to suggest that government spending produces no benefit at all; however, it is likely to produce a smaller benefit than if that money were left in private hands. High taxes not only take excessive amounts of money out of private hands, they also make the jurisdictions levying those high taxes less attractive places to live and thereby put them at a competitive disadvantage. The mobility of taxpayers gives them an opportunity to “vote with their feet” by moving to more attractive places to live. Statistical evidence confirms that.”
In the conclusion, Stansel writes:
“ . . . These findings have clear policy implications for local politicians (and for those at all levels of government). Economic prosperity is more likely to occur if tax burdens are kept low, especially relative to neighboring areas. This requires a strong emphasis on spending taxpayer resources wisely. However, that’s no different than what private businesses must do. Just like businesses must keep costs low in order to successfully compete with other businesses for customers, governments must keep spending and taxes low in order to successfully compete with other governments for mobile residents and businesses. This is particularly true in periods of economic downturn when taxpayers are especially sensitive to the various costs of living . . . .”