The States Move to the Supply Side

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Can the government really cut taxes andbalance the budget all at the same time? For Washington, it’sclearly a Herculean task given the meteoric rise in the budgetover the past 20 years. But ask Gov. Christine Todd Whitman ofNew Jersey how tough it is to cut tax rates and balanceexpenditures and receipts at the end of the year. Or ask FifeSymington of Arizona. Or John Engler of Michigan. Or even ask aDemocratic governor like Zel Miller of Georgia.

These and 20 other governors havecut state taxes in recent years while not only managing to keepthe budget in the black but jump‐​start their state economies. Thedirty little secret about Bob Dole’s tax cut proposal is thatwhile supply side tax policies seem to be in great disrepute inWashington — in the rest of America they’ve become standardoperating procedure. Even many Democratic governors, such as EvanBayh of Indiana, acknowledge that states have to “cut taxesor fall further behind economically.”

The facts support thatproposition. For example, in recent years tax‐​cutting states have substantiallyoutperformed tax raisers. At Cato, we compared the economic andfiscal results in the 1990s in the 10 states that increased taxesthe most with the results in the 10 states that cut taxes themost (see Table).

  • 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). Moody’s bond ratings are higher for the states that cut taxes than for 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.

The states’ experience withreducing taxes is of special relevance to the current debate in Washington,because many states have reduced income tax rates across theboard — as Bob Dole proposes. The top 10 tax‐​cutting statesreduced taxes as a share of total state tax collections by about6 percent to 7 percent. Michigan cut tax revenues by more than 10 percent.The Dole plan would reduce total federal revenues by 5.2 percenton a static basis and by 4.1 percent on a dynamic basis (adjustingfor higher economic growth from the tax cut).

Arizona is perhaps the mostcompelling case study in the dynamic effects of tax cuts. Under FifeSymington, taxes have been cut by $1.5 billion since 1992. Thetop income tax rate has fallen from 8.7 percent to 5.6 percent.Over that period job creation, population and new businesscreation have grown at three times the national average.Employment had actually fallen in Arizona in the two years beforeSymington’s tax cuts. “In Arizona, tax cutting “is an economicissue — and a freedom issue,” declares Symington.

In New Jersey two‐​thirds of the150,000 jobs lost under Gov. Jim Florio’s soak‐​the‐​rich policieshave been recovered under Gov. Whitman. “Income tax cutswere the spark plug for the economic revival in New Jersey,“boasts Whitman.

Not surprisingly, those kinds ofsupply‐​side success stories are rarely, if ever, reported by Dan Ratheror Peter Jennings on the nightly news. But the lessonsto be learned from tax cutting governors is quite unmistakable:on pro‐​growth tax policy, the states have demonstrated they willlead. Why does Washington lack the good sense to follow?

Taxes and State Economic Performance in the 1990s
Top 10 Tax‐​Increasing States, FY90-96
Employment 1995
Growth Unemploy‐
1990 – 95 ment Rate
1. Rhode Island -6.7% 7.0%
2. West Virginia 4.5% 7.9%
3. Connecticut -7.1% 5.5%
4. Vermont 5.8% 4.2%
5. Maine 0.6% 5.7%
6. Montana 8.7% 5.9%
7. California -0.8% 7.8%
8. Kentucky 5.9% 5.4%
9. Massachusetts -1.2% 5.4%
10. Arkansas 11.0% 4.9%
Tax Hikers Avg. 0.0% 6.0%
Top 10 Tax‐​Cutting States, FY90-96
Employment 1995
Growth 1990 – 95 Unemployment Rate
1. Hawaii 2.3% 5.9%
2. Michigan 5.8% 5.3%
3. Oregon 11.6% 4.8%
4. Utah 19.9% 3.6%
5. Idaho 22.0% 5.4%
6. Wisconsin 11.1% 3.7%
7. Arizona 18.3% 5.1%
8. Virginia 7.7% 4.5%
9. New Hampshire 2.6% 4.0%
10. Colorado 19.5% 4.2%
Tax Cutters Avg. 10.8% 4.7%
U.S. Average 5.9% 5.6%

Stephen Moore

Stephen Moore is director of fiscal policy studies at the Cato Institute.