when the economy soared in the 1990s
Tax Policy and Economic
and the most devastating bust cycles
Growth in the 1990s
when the economy collapsed. Governors
should be looking for ways to flatten tax
rates not only as a way to make their rev-
This report card emphasizes the impor-
enue systems less volatile but also as a
tance of tax cuts in general because the evi-
way to make their states more attractive
dence shows that states that reduce taxes
to businesses and to spur economic
improve their prospects for economic growth.
growth. It's also worth noting that the
For example, a 1996 study by Zsolt Besci of the
governor who received the highest grade
Federal Reserve Bank of Atlanta found that
in the category of tax policy in this report
"relative marginal tax rates have a statistically
card is Jon Hunstman of Utah, who pro-
significant negative relationship with relative
posed a flat tax reform plan in his state.
state growth averaged for the period from
· Glancing at the records of many of the
1961 to 1992."7 The message of the study for
governors in this report card, you might
state governments is that "lowering aggregate
notice a smattering of proposals termed
state and local marginal tax rates is likely to
"tax reform" that might be more accu-
have a positive effect on longterm growth
Constitutional
rates."8 A study for the congressional Joint
rately described as "tax shifts"--meaning
spending
that taxes are lowered on one segment of
Economic Committee by Richard Vedder of
Ohio University came to a similar conclusion.9
the taxpaying base and raised on anoth-
restraints
er to make up the difference. These rev-
A study by Thomas Dye of Florida State
coupled with tax
enue-neutral plans are certainly prefer-
University found that states with no income
cuts are arguably
able to plans that result in net tax hikes.
tax had higher personal income growth (and
However, now that states are starting to
smaller government growth) than states that
the best antidote
had an income tax.10
rack up budget surpluses again, cou-
to bloated
pling tax reform with tax cuts should be
Tax changes enacted in the states offer a
an easier sell politically. Governors in
useful laboratory for exploring the effects of
budgets during
states with archaic and growth-hinder-
tax policy. A comparison of the economic
boom years and
ing tax systems should use this opportu-
performance of the 10 states that increased
out-of-control
nity not just to reform those systems but
taxes the most with the economic perfor-
to lighten the tax burden on their citi-
mance of the 10 states that cut taxes the most
deficits during
zens, too.
during 19902005 suggests that when states
lean years.
· Finally, if states and the federal govern-
reduce taxes they improve their relative eco-
nomic performance.11 The results are sum-
ment don't do something to slow the
stampeding growth of Medicaid, health
marized in Table 3.
care costs will swallow up state budgets.
An analysis by the American Legislative
Employment Growth
Exchange Council found that if Medi-
Businesses and jobs migrated to low-tax
caid stays on its path of double-digit
states in the 1990s. Job growth averaged 25
growth over the next generation, health
percent in the top 10 tax-cutting states, high-
care costs will consume virtually the
er than the national average of 22 percent,
entire budget in most states.6 Of necessi-
while the top 10 tax-hiking states experi-
enced employment growth of around 20 per-
ty, states will have to move toward cost
cent.
containment strategies for Medicaid,
including copayments, vouchers, and
Personal Income Growth
malpractice reform. Constantly raising
Wealth grew faster in the tax-cutting states
taxes to cover the cost overruns of a bro-
than it did in the tax-hiking states. Indeed, tax-
ken system will begin a vicious cycle that
cutting states saw personal income grow
will only hurt states.
7