Wednesday, August 31, 2016

The Academic Literature on State Tax Cuts

by Levi Russell

State fiscal policy continues to be a popular issue. Some are criticizing right-leaning state governments for lowering taxes with the intention of boosting growth. These commentators point out that growth in these states has not skyrocketed. Others are criticizing left-leaning states for funding issues with their public pensions and financial problems associated with Affordable Care Act co-ops. These other commentators point out that these financial issues are not easy to solve and that a more conservative spending approach is probably warranted.

So, being an economist, I thought I'd look at the academic literature on the effects of state-level taxation on economic growth. I pulled the 5 most recent articles I could find on the subject from Google Scholar and looked at the results. Of the 5 articles (of which one examined Canadian provinces) I read, 4 showed a negative effect of state taxation on growth. One showed no effect on own-state growth, and a positive effect from other states' tax increases. I may have missed some other important analysis on this subject, but it seems to me that we can (at least provisionally) conclude that 1) it's not likely that lower taxes are harming growth at the state level and that 2) it's probably a good idea to find ways to fix over-spending rather than increase taxes.

Here are the articles I read. If I missed an important, recent paper, please link to it in the comments below!

Another look at tax policy and state economic growth: The long-run and short-run of it, Economics Letters, 2015, Bebonchu Atems (one of my former graduate school colleagues)

The Determinants of U.S. State Economic Growth: A Less Extreme Bounds Analysis, Economic Inquiry, 2008, W. Robert Reed

The Impact of Tax Cuts on Economic Growth: Evidence from the Canadian Provinces, National Tax Journal, 2012, Ergete Ferede and Bev Dahlby

Redistribution at the State and Local Level: Consequences for Economic Growth, Public Finance Review, 2010, Howard Chernick

The Robust Relationship between Taxes and U.S. State Income Growth, National Tax Journal, 2008, W. Robert Reed

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