February 3, 2015

February 3, 2015 | Commentary on Economy, Tax Cuts

The Tax-Cutting Boon Sweeping the States

While the prospects for tax reform in Washington are dim, as many as 20 Republican governors are moving forward with their own pro-growth tax-relief initiatives. This is on top of the 14 states, including Florida, Michigan, Ohio and Wisconsin, whose 2014 tax cuts will take effect this year.

Arizona’s new Gov. Doug Ducey says his goal is to eventually eliminate the state income tax—joining the nine states that already don’t tax their residents’ wages and salaries. Mr. Ducey has promised income-tax cuts “every year I’m in office.” He announced his first cuts, indexing tax brackets for inflation and expensing for business capital spending, this month. To offset phasing out the income tax, he wants to close some of the state’s hundreds of sales-tax exemptions.

In Arkansas, Republicans now control both houses of the state legislature and the governorship for the first time in more than 100 years. This will allow Asa Hutchinson, the state’s new governor, to push what he calls a “very ambitious” tax-reform agenda. Last week the state senate in Little Rock passed a one-percentage-point cut in the income-tax rate applying to middle-income earners ($21,000-$75,000).

In Illinois, Maryland and Massachusetts—three blue states that elected Republican governors in November—tax rates are likely to fall to provide juice and jobs for local economies. In Illinois, Gov. Bruce Rauner vowed in his inaugural address to erase the income-tax-rate hikes of his Democratic predecessor, Pat Quinn. In Maryland, Larry Hogan won the governor’s race by pledging to overturn “as many as possible” of the 19 taxes and fees that were raised by his predecessor, Democrat Martin O’Malley. And in Massachusetts, Charlie Baker plans to eliminate the state tax on business inventory and cut the corporate income tax.

The story is the same in many other states. Gov. Nikki Haley of South Carolina proposed a gas-tax hike on Jan. 21 to offset reducing the top state income-tax rate to 5% from 7%. Ohio’s Gov. John Kasich lowered the highest personal income tax to 5.39%, and he has proposed trading higher oil-and-gas-production taxes for lower income-tax rates, though the collapse in oil prices over the past six months may require a new strategy.

In Maine, Gov. Paul LePage also wants to end the income tax in order to “compete with big states.” His new budget proposes cutting the top income-tax rate to 5.75% from 7.95% and eliminating the estate tax while broadening the sales tax.

In Tennessee, which imposes no income tax on wages and salaries, Republican state Sen. Bill Ketron, who runs the revenue committee, will push a bill to eliminate the state’s tax on investment income—the 1929 “Hall tax,” named after the original senate sponsor, Frank Hall. In Nebraska, newly elected Gov. Pete Ricketts has proposed a sweeping statewide property-tax cut, while the state senate is moving forward with a plan to cut the top income-tax rate to 5% from 6.84%.

There are a few Republican governors bucking the trend. Terry Branstad in Iowa and Rick Snyder in Michigan are pushing for major gas-tax hikes with no offsetting tax cuts. Brian Sandoval in Nevada wants to raise business taxes to pay for a 12% hike in state spending. The state’s Republican-controlled legislature is not likely to go along.

These tax-hike proposals are the exceptions. Most of the 31 Republican governors recognize that the states with lower taxes on working, investing and business activity are winning the competition for jobs and businesses. There are more than 50 peer-reviewed academic studies that have found that higher state tax rates on income and businesses lead to fewer jobs and growth inside the state. American governors increasingly get that.

“It’s all about making our state competitive,” says Mr. Ducey about his tax agenda. “We want those jobs and companies that have been headed to no-income-tax states like Florida and Texas to start coming here at a faster pace.”

Indiana Gov. Mike Pence, whose state is experiencing a manufacturing revival, makes a similar argument. “Taxes aren’t everything, but we see the evidence every day from the superior economic performance of low-tax states, so we want to duplicate the success of places like Texas and Tennessee,” Mr. Pence says. “You can just follow the direction of the U-Haul vans to find out where the growth is happening in America.”

Texas is the model for many Republican governors. According to the Bureau of Labor Statistics, from December 2007, the official beginning of the Great Recession, through October 2014 Texas created more jobs than the other 49 states combined. But Texas, which has no income tax, is not done. The new governor, Greg Abbott, says that “we can still make things better here by cutting business and property taxes—which is what I intend to do.”

Labor unions and liberal groups had hoped to discredit tax cuts on the state level by spending millions of dollars to defeat incumbent governors Sam Brownback of Kansas, Rick Scott of Florida and Scott Walker of Wisconsin. But these tax-cutters were re-elected while voters told tax hikers such as Illinois Gov. Quinn to take a hike. “One message from the last election was that voters want lower taxes and more cost-conscious government,” says Mr. Walker.

Many governors have come to understand that states aren’t just competing against each other for businesses and jobs. As Mr. Kasich puts it, “In Ohio we’re in a contest against Europe, Asia and the rest of the world, so we have to keep our taxes low.”

That has become the dominant view in statehouses this year, and it explains why the big tax-cutting activity in 2015 won’t be in Washington but in state capitals.

 - Mr. Moore is chief economist at the Heritage Foundation

About the Author

Stephen Moore Distinguished Visiting Fellow
Project for Economic Growth

Originally appeared in The Wall Street Journal