NCPA - National Center for Policy Analysis


April 28, 2010

Most Americans are bluntly aware that taxes matter.  Unfortunately, too many politicians and bureaucrats have forgotten that taxes change the incentives for people to work hard, save, invest and be entrepreneurial.  As the nation struggles with a sluggish recovery and deficits, it's worth noting the tax differences across the states, says Forbes magazine. 

In "Taxifornia," the new study by the Pacific Research Institute, the authors look at two distinct aspects of tax policy: burden and structure.  In other words, the study examines how many resources a government consumes from the economy and how, exactly, the state extracts those resources.  The premise is that both the tax burden and manner of imposition influence behavior and economic performance. 

For example, the total burden of government was calculated by comparing total state and local spending as a share of the state economy (gross state product): 

  • South Dakota had the lowest burden of government (11.6 percent of the state's economy); other low-burden states include Delaware and Texas.
  • Alaska had the largest burden of government (20.2 percent of the state's economy consumed by government spending); other large burden states are South Carolina, California, New York and New Mexico. 

The second component of the study looked at the structure or design of five major taxes:  personal income taxes, corporate income taxes, capital-based taxes, sales taxes and property taxes: 

  • Delaware ranked first overall for its structure of taxes with a score of 7.7 out of a possible 10.
  • Other high ranking states included South Dakota, Nevada and Alabama.
  • New Jersey ranked last for its tax design (score of 2.8); Maine, Vermont and Rhode Island also ranked low. 

When burden and structure are combined to calculate an overall score, South Dakota achieves the highest rank with a score of 8.8 (out of possible 10).  Delaware, Texas and Louisiana also rank high.  California (score of 3.1) along with South Carolina and New York are the lowest ranked states, combining a relatively large burden of government with a poorly structured tax system, says Forbes. 

It should not be surprising, then, to learn that both California and South Carolina are facing historically high unemployment with shockingly high underemployment.  Both are signs of a struggling economy, in many ways explained by the economic incentives embedded in the tax system, says Forbes. 

Source: Jason Clemens and Robert Murphy, "The Most Tax-Burdened States," Forbes, April 26, 2010. 

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