Taxing Logic: One Revenue-Cutting Trick Is a Real Laffer

One of our favorite pastimes at Frying Pan News is exploding those irritating little factoids the Right likes to use to make its case for some policy or another. Myths like the Welfare Queen, or overpaid public employees, or the perennial American classic about bootstraps. (Since it seems that so many of these fraught conversations take place at family gatherings, we often call them “brother-in-law conversations.”)

Just in time for tax season, a new myth has been making the rounds: that states with no income tax fare better, economically, than other states. This notion is most associated with Arthur Laffer, the voodoo economist, but it has been amplified by, among others, ALEC (American Legislative Exchange Council) and the Wall Street Journal. Unsurprisingly, state politicians have taken up the call: In the name of spurring growth, some are citing Laffer’s work and proposing a reduction or elimination of state income taxes.

Kansas, for instance, is considering a dramatic tax overhaul that would eliminate the state income tax (as well as tax credits for the poor) and lower the state sales tax. This would have the perverse effect of raising taxes on the poorest residents. According to the Los Angeles Times, “A Kansas House tax committee passed a bill in which anyone making less than $25,000 a year — roughly half a million of the state’s 2.9 million residents — will pay an average of $72 more in taxes, while those making more than $250,000 — about 21,000 people — will see a $1,500 cut.”

But maybe some slight unfairness is okay if it serves the greater good: a rising tide, and so on. Not so fast, brother-in-law.

The D.C.-based Institute on Taxation and Economic Policy just released a report examining Laffer’s claims that the nine states with no income taxes outperform the nine states with the highest income taxes. (Since California is one of the nine “high-tax” states, we have a real dog in this fight.) Conclusion: not only is this false, but in fact it’s likely that the opposite is true!

If you look at per-capita economic growth over the last decade, the high-tax states outperform the no-tax states (10.1 percent vs. 8.7 percent). If you look at changes to the median family income over the last decade, high-tax states again outperform (-0.7 percent vs. -3.5 percent). If you look at the average annual unemployment rate over the last decade, there is no difference between the two groups (5.7 percent).

So how does Laffer (and the WSJ, and the Kansas and Oklahoma governors) get away with his claim? By fudging, of course. Instead of the sort of economic indicators mentioned above – the sort that actually matter in people’s lives – Laffer focuses on total growth in a state’s economic output. Because of the close correlation with population growth, this provides a distorted view. Once you adjust for changes in population (see paragraph above), Laffer’s findings vanish.

(Several of the no-tax states also have unique economic factors that allow them to generate revenue without an income tax: Alaska, Wyoming and Texas are among the most mineral- and energy-rich states, and Nevada generates much of its income from the gaming industry.)

If it’s so easy to debunk these sorts of empirical claims (“reality has a well-known liberal bias,” Stephen Colbert has noted), then why do they persist? Maybe that’s the question to put to your brother-in-law.