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August 25, 2014

Low-Tax States Create More Jobs Than High-Tax States

By

First, an apology. In a July 2 article on this page, I erred in citing Bureau of Labor Statistics numbers comparing the superior job-creation performance of no-income-tax Texas and Florida to the states with the highest income-tax rates, California and New York.

My errors set off a brouhaha in the media — though the errors in no way change the conclusion that low-tax states have grown much faster than high-tax states.

I wrote that Texas had gained one million jobs in the last five years, while California lost jobs. That was correct from the start of the recession in 2008 through the end of 2013. The BLS household survey on employment finds that over this period, Texas gained 1.08 million jobs and California lost 5,000.

The New York Times and others have criticized me for not including the numbers through the first half of 2014, which show that California has made a rapid turnaround and gained jobs.

As for Florida, I wrote that it gained hundreds of thousands of jobs, while New York lost jobs. New York did indeed lose 221,000 jobs over this period. But Florida created only 29,000.

Times columnist Paul Krugman seized on these revised numbers to argue that taxes don't matter much when it comes to economic growth. He examined the BLS job growth from December 2007 through June 2014 and found: "Texas is, not surprisingly, the best performer. New York comes in second, followed by California, with Florida in last place. Not much of a clear ideological message."

Yet even over the timeline that Krugman chose, Texas and Florida combined had net job growth of 4.8%, which exceeded by a healthy margin that of California's and New York's 1.3% — hardly a persuasive counterargument that tax rates don't matter.

Krugman concluded: "Real empirical work on state growth shows multiple factors — mildness of climate, cheap housing, high wages and, yes, some impact from tax rates. The idea that you would find an overwhelming one-factor correlation with taxes alone is something only a, well, Heritage Foundation analyst could believe."

This is like arguing that cancer doesn't kill you because many people die from heart disease and stroke.

It's always best to examine trends over long periods. This helps smooth out statistical noise and extraneous short-term factors such as real estate bubbles, oil booms and stock-market bull and bear markets that can distort the picture and cause some states to accelerate and others to swoon.

So I went back to 1990 to examine the longer-term picture of these four states through June 2014. Remember, Texas and Florida have no income tax, and New York (counting New York City's income tax) and California over this period had nearly the highest rates (maxing out at about 13%).

The results: Texas, up 65%; Florida, 46%; national average, 27%; California, 24%; New York, 9%.

For every net new job in California, Texas gained more than two. (Weather doesn't explain that, nor does the oil-price spike, because California is also one of the largest oil- and gas-producing states.) For every new job in New York, Florida gained five. Florida had almost double California's job growth.

Arthur Laffer and I have examined the data back to 1970. No matter what 10-, 20- or 30-year period we reviewed, we found that the nine states with no income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — outperform the nine highest income-tax states, including California, Hawaii, New Jersey and New York.

Job growth in no-income-tax states is typically double and sometimes triple the pace of the states with the highest taxes on work and small businesses.

Yes, there are always outliers — a few states with high income taxes that perform well. California's Silicon Valley is surging now, while some low-tax states (Alaska of late) are doing poorly. Clearly many other factors are at play.

But taxes are indisputably a major factor in determining where businesses and capital and families locate. Consider the evidence from states that have adopted an income tax in the last 50 years. Since 1960, they've numbered 11, including Illinois, New Jersey and Connecticut.

Every one of them has experienced slower growth than the rest of the country after adopting the income tax, and each lost income and population relative to the national average. Does anyone really believe that happened by chance?

Why are income taxes so harmful? Because they are direct taxes on work, saving, investing and business creation. They are taxes on virtue rather than vice. We tax cigarettes because we want people to stop smoking. So why do we tax work?

It's curious how the left continues to deny this clear linkage between income taxes and job creation. After all, we've had a painful firsthand lesson on the impact of taxes on business location at the national level.

Businesses are leaving the United States to lower their tax burden. The U.S. charges as much as 40% (including state taxes), while the rest of the world averages closer to 25%. President Obama and congressional Democrats are so panicked by this exodus that they want to make it illegal for companies to merge with certain foreign companies and leave.

If we can all agree that corporations are moving across international borders to lower their taxes, why is it so hard to believe that families and businesses will move from one state to another to lower theirs?

 - Moore is chief economist at the Heritage Foundation.

Originally published by Investor's Business Daily

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