September 17, 1996
Stephen Moore is director of fiscal policy studies and Dean Stansel a fiscal policy analyst at the Cato Institute
The states can serve as valuable "laboratories of democracy" on the issue of whether tax cuts can lead to higher economic growth and balanced budgets. This study examines the state experience with tax increases and tax cuts in the 1990s. We compare the economic and fiscal results in the 10 states that increased taxes the most with the results in the 10 states that cut taxes the most.
The tax-cutting states have not only balanced their budgets; they also have much larger budget reserves (7.1 percent of state expenditures) than the 10 tax-increasing states (1.7 percent). The Moody's bond ratings are higher in the states that cut taxes than in the states that raised them. Cutting taxes at the state level improves the fiscal condition of the state, contrary to predictions of higher deficits.
The tax-cutting states have economically outperformed the tax-raising states in the 1990s. The economies of the tax-raising states grew by 27 percent (in current dollars) from 1990 to 1995. The economies of the tax-cutting states grew by 33 percent over that period. Even on a per capita basis, the tax-cutting states saw a faster rise in income than the tax raisers.
Income for a family of four grew by $1,600 more in the tax-cutting states than in the tax-raising states.
Americans continue to vote with their feet against tax hikes. In the 1980s roughly 1,000 people every day left the highest tax states for the lowest tax states. In the 1990s the population has grown by 4.2 percent on average in the 10 tax-raising states. But population has grown by 7.4 percent in the tax-cutting states--two percentage points above the national average.
Jobs are much more prevalent in the 1990s in the tax-cutting states. The 10 tax-raising states created zero net new jobs from 1990 to 1995. The tax-cutting states gained 1.84 million jobs, an increase of 10.8 percent.
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