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Arthur Laffer, left, is considered the father of supply-side economics. Here he is pictured with President Ronald Reagan. (Laffer Center) Arthur Laffer, left, is considered the father of supply-side economics. Here he is pictured with President Ronald Reagan. (Laffer Center)

Arthur Laffer, left, is considered the father of supply-side economics. Here he is pictured with President Ronald Reagan. (Laffer Center)

By Derek Tsang July 28, 2014

Are states without an income tax doing 'better' than ones that do?

Bill Maher used the latest jobs numbers out of Kansas as an occasion for his "Zombie Lies" segment about what he calls "lies that Republicans tell that you can debunk, but they do not go away."

One such "zombie lie," Maher said, is "trickle-down economics, the idea that you cut taxes for rich people and then the job creators get job creating and then the economy just blooms." The latest nail in Maher’s zombie coffin is the "revenue collapse" Kansas is facing after its Legislature passed 25 percent cuts to individual tax rates in 2012.

Jamie Weinstein, senior editor for the Daily Caller, came to the defense of the supply-siders. "It’s too early to make a declarative judgment" on Kansas’ tax cuts, Weinstein said. "There’s been studies of nine states that have no income state tax versus nine states with the highest state income tax. Which do you think have done better? It’s not the states with the highest state income tax."

Millions of words have been spilled arguing about the effect taxes have on the economy. We can’t resolve that debate here, but we wanted to check Weinstein’s claim that the nine states with no state income tax outperformed the nine states with the highest state income taxes.

It turns out there are metrics that support Weinstein’s point -- and others that contradict it.

Arthur Laffer

Weinstein told us he was referring to a study from the Laffer Center for Supply-Side Economics authored by Arthur Laffer, the so-called "father of supply-side economics," and Stephen Moore, another pre-eminent supply-side economist.

Laffer’s argument in "Taxes Really Do Matter" has been persuasive. He actually helped design the Kansas tax cuts that Weinstein was defending, and Kansas Gov. Sam Brownback seemed to refer to Laffer’s research when he said that "pro-growth states with no state income taxes … are among the country’s strongest economic performers."

Laffer and Moore analyzed nine "no-tax" states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, Tennessee and New Hampshire) and compared them to nine "high-tax" states (California, Hawaii, Maine, Maryland, New Jersey, New York, Ohio, Oregon and Vermont).

Laffer and Moore look at the average growth from 2001-10 for each set of states in four factors: population, Gross State Product (GSP: GDP but for states), employment, and state and local tax revenue.

By each of these four measures, the nine states without an income tax outperform the high-tax states.

Another way to look at it

So Weinstein cited Laffer’s study accurately. But there is more to the story.

Dick Lavine, a senior fiscal analyst at the left-leaning Center for Public Policy Priorities, said Laffer’s measures are not what economists usually use to judge a state’s success. "The trouble with Laffer’s study is that fast-growing states look good by his measure mainly because of population growth, not because of any excellence in the economy."

The Institute on Taxation and Economic Policy (ITEP) -- a research group that partners with Citizens for Tax Justice, which advocates for the tax interests of middle- and lower-class families -- responded to Laffer’s research with its own study, "‘High rate’ Income Tax States Are Outperforming No-Tax States."

The results, as you might imagine, are 100 percent opposite of the Laffer analysis.

Whereas the Laffer Center study looks at raw totals, ITEP looked at three per capita statistics that Ralph Martire, executive director of the Center for Tax and Budget Accountability, called "the three major economic indicators."

"The nine states with the highest individual income tax rates had better change in median wage (-0.7 percent to -3.5 percent) and significantly better growth in state GSP per capita (10.1 percent to 8.7 percent)," Martire said, while "no-tax states had marginally better unemployment."

Other factors

While the Laffer Center study argues that population is a valid measure for economic growth -- they look in particular at migrants between high-tax and no-tax states -- it’s tough to attribute that growth solely to the absence of an income tax.

"The majority of population growth is natural increase," Lavine said, noting that Texas and Florida have relatively high Latino populations, who statistically have more kids per family. Eight of the no-tax states are also in the South and West, which have seen their populations increase since the popularization of air conditioning after World War II.

Even setting aside population, income tax alone doesn’t capture the full difference between states, said Jay Ritter, professor of finance at the University of Florida.

"As the ITEP notes, some states have no income taxes because they can generate revenue from taxing tourists or taxing oil extraction," Ritter said. "Lowering income tax rates or eliminating them does attract residents, but if lower revenue is generated, at least in the short run, the state has to either increase other taxes or cut expenditures."

Texas, for example, has particularly high local property taxes and is also having problems funding its school system, according to the New York Times.

Scott Drenkard, an economist for the conservative-leaning Tax Foundation, noted that differences between states make it hard to draw conclusions just from the Laffer Center’s nine versus nine comparison. Case studies "can be fruitful," Drenkard said, "but you should be careful to try to compare apples-to-apples as much as possible."

Our ruling

Defending Kansas’ tax cuts, Weinstein claimed that the states that are doing "better" are the ones that have no income state tax.

Weinstein is accurately citing a study by the Laffer Center that compares states on their growth in population, GSP, total jobs, and total state and local tax revenue. To Laffer, no-tax states are besting high-tax states.

But we found another study from the Institute on Taxation and Economic Policy that concluded the exact opposite, by using a different set of measurements.

In the end, measuring "better" ultimately is in the eye of the beholder, and we’re not going to settle this economics debate. But Weinstein isn’t going to either. We rate his claim Half True.

Our Sources

Jamie Weinstein, Real Time With Bill Maher, July 18, 2014

Email interview with Jamie Weinstein, July 20, 2014

Interview with David Lavine, senior fiscal analyst at the Center for Public Policy Priorities, July 20, 2014

Interview with Ralph Martire, executive director at the Center for Tax and Budget Responsibility, July 20, 2014

Email interview with Jay Ritter, Joe B. Cordell Eminent Scholar at the University of Florida, July 20, 2014

Email interview with Scott Drenkard, economist at the Tax Foundation, July 20, 2014

Laffer Center for Supply-Side Economics, "Taxes Really Do Matter: Look at the States," September 2012

Institute on Taxation and Economic Policy, "‘High Rate’ Income Tax States Are Outperforming No-Tax States," February 2012

The New York Times, "The Joys of No Income Tax, the Agonies of Other Kinds," May 24, 2013

The Tax Foundation, "What is the Evidence on Taxes and Growth?" December 18, 2012

Bloomberg Businessweek, "Brownback Tax Cuts That Ravaged Surplus Hinder Re-Election Bid," July 16, 2014

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