NCPA - National Center for Policy Analysis

Lower Taxes Do Matter

November 5, 1996

Last year, 21 states passed tax cuts -- following on the heels of other states which had done so earlier. The reason for this trend, according to fiscal and business researchers, is that lower taxes stimulate economic growth.

A survey of research by Timothy Bartik of the W.E. Upjohn Institute revealed that, on average, a 10 percent reduction in state taxes raises employment and business activity, in the long run, by about 2.5 percent. Some consider that estimate conservative, since tax changes now have a greater impact than in the past.

Lower taxes can generate a number of changes:

  • People move from high-tax to low-tax states -- an average of 1,000 people a day over the past 15 years have moved from the 10 highest-tax states to the 10 lowest-tax states, according to calculations by Richard Vetter of Ohio University.
  • In New Jersey, the state's economy reversed its decline when a $1.2 billion tax cut began to take effect.
  • In California, where a 1991 tax hike prolonged a state recession until 1993, the economy began to turn upward when a tax hike on high incomes expired in 1995.

But that may change, observers say, if California's Prop. 217 -- which would reinstate 10 percent to 11 percent tax brackets for upper-income families and small business owners -- is approved.

As for deficits "exploding" when tax cuts are enacted, those states which have cut taxes have actually seen the most improvement in their fiscal standings. Tax-cut advocates point to New York, Massachusetts and Michigan as prime examples.

Source: Perspective, "Do State Tax Cuts Work?" Investor's Business Daily, November 5, 1996.


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