billion on unemployment benefits.26 Today
ployment rate of only 0.6 percentage points,
the unemployment rate is at its lowest level in
and a $300 real increase in personal income per
20 years, and the problem in many states is not
family of four.
a shortage of jobs but a shortage of workers.
The contrast was even greater when only
The increase in the number of workers paying
income tax changes were considered. The top
into unemployment compensation systems
10 income-tax-hiking states experienced the
and the decline in the number of unemployed
net loss of 182,000 jobs, a 2.3 percentage point
drawing benefits have created huge and in
increase in the unemployment rate, and a
some cases unprecedented surpluses in state
$613 real decline in personal income per family
unemployment insurance trust funds.
of four. The top 10 income-tax-cutting states
When those four factors are taken together,
saw 975,000 net new jobs, an increase in the
it would be reasonable to expect that state
unemployment rate of only 0.3 percentage
spending would be flat or even declining
points, and a $148 real increase in personal
slightly--even without a long-overdue recon-
income per family of four. Other studies have
sideration of the scope of state government.
found similar correlations between high taxes
Instead, the budgetary savings have simply
and slow economic growth.
helped finance an explosion of expenditures in
We have updated the 1993 Joint Economic
States with high
other areas of state budgets.
Committee analysis using Census Bureau data
and rising tax bur-
through 1997. We find that the negative rela-
tionship between taxes and growth at the state
dens are more
The Economic Case for State
level is still as pronounced as ever. Table 10
likely to suffer
Tax Cuts
shows our findings. The 10 states with the
economic decline,
highest per capita state tax burdens in 1990
There is increasing evidence that their tax
experienced economic growth that was at
while those with
and budget policies can have a significant
most half the rate of that of the 10 states with
lower and falling
impact on the relative economic performance
the lowest per capita state tax burdens.
of states. Studies have consistently shown that
tax burdens are
· Population growth was 10.5 percent in
states with high and rising tax burdens are
more likely to
more likely to suffer economic decline, while
the lowest tax states vs. only 5.5 percent
enjoy robust eco-
those with lower and falling tax burdens are
in the highest tax states.
· Real personal income grew by 23.7 per-
more likely to enjoy robust economic
nomic growth.
growth.27 For example, a 1996 study by the
cent in the lowest tax states but by only
9.9 percent in the highest tax states.
Federal Reserve Board of Atlanta examined
· Job growth was 14.9 percent in the lowest
state economic performance from 1960 to
1992 and found that "tax rates [average and
tax states, compared to only 3.9 percent
marginal] are negatively related to growth and
in the highest tax states.
are sufficiently variable over time to reason-
Is Cutting State Taxes Fiscally
ably explain variations in growth rates."28
Irresponsible?
A study by the Joint Economic Committee
In recent years proposals to reduce or even
of Congress examined the economic growth
cap state taxes have been resisted for two rea-
records of the 10 states that had raised taxes
sons. First, opponents maintain that state tax
the most in fiscal years 1990 through 1993
cuts will deplete state treasuries of funds need-
and the 10 states that had cut taxes the most
ed to pay the bills and keep the budget in bal-
during that same period. The top 10 tax-hik-
ance. Second, opponents claim that the high-
ing states experienced a net gain of only 3,000
est priority for any unexpected tax revenues
new jobs, an increase in the unemployment
should be to fix the schools, rather than to cut
rate of 2.2 percentage points, and a $484 real
taxes. This section examines the validity of
decline in personal income per family of four.29
each of those claims.
In contrast, the top 10 tax-cutting states saw
The first issue is whether tax reductions
653,000 net new jobs, an increase in the unem-
21