NCPA - National Center for Policy Analysis

States Face Laffer Curve, As High Taxes Reduce Revenue

June 4, 2002

Faced with revenue shortfalls, many of the nation's governors are turning to tax increases. But when they tried this during the economic downturn of the early 1990s, the states that raised taxes to balance their budgets dug deeper financial holes.

Tax hiking states lost businesses and taxpayers, prolonging the recession in those states.

  • In 1991 and 1992, California, Connecticut and New Jersey raised income taxes only to see tax revenues decline still further.
  • Revenues fell because upper-income homeowners and businesses fled to more tax-friendly climates like the Carolinas, Florida, Nevada and Texas.
  • In fact, after California raised its incomes taxes on the rich to nearly 10 percent in 1992, the state actually lost domestic population and revenues for the first time in history.

The states that took the opposite course -- cutting taxes and state spending -- saw both revenues and personal income grow.

  • New Jersey's tax receipts grew twice as fast in the two years after Gov. Christie Whitman cut the income tax as they had in the two years after her Predecessor, Gov. Jim Florio, raised it.
  • In Michigan, Gov. John Engler cut income taxes, froze state agency spending and eliminated low priority programs -- over the next five years, Michigan led the nation in job creation and income growth.
  • Furthermore, over the last 10 years the states that lessened their tax burdens the most have created almost twice as many jobs as the states that increased their tax burden.

Source: Stephen Moore (Club for Growth), "Governors and Drunken Sailors," National Review, June 3, 2002.

 

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