Economic Argument for State Tax Cuts Weakens Further

A new study by William Gale, Aaron Krupkin, and Kim Rueben at the Tax Policy Center (TPC) further undermines claims that states can improve their economies by cutting taxes.  

To make their case, tax-cut proponents often point to a 2008 paper by economist Robert Reed, which seemed to produce clear evidence that tax cuts promote growth.  But when the TPC researchers replicated Reed’s statistical analysis and extended it for another ten years, his results fell apart.  Simply by expanding the time period, they found that taxes have a statistically insignificant impact on growth.  And when they split the time period in two, they found that higher taxes are associated with stronger economic growth in the more recent period, from 1992 to 2006. 

The TPC researchers also used Reed’s methodology to examine the impact of particular types of state taxes.  They found that higher personal and corporate income taxes are usually associated with higher economic growth — the opposite of what tax-cut proponents often claim. 

The TPC study builds on research undermining several other studies often touted by tax-cut proponents.  The TPC researchers highlight an article by economics professor Rex Pjesky that replicated and extended the findings of five previous studies finding that higher state taxes generally slow economic growth.  When Pjesky applied a single measure of economic growth and single time interval to all five studies, the results often showed that higher state taxes either are associated with stronger economic growth or have a statistically insignificant impact on it, “demonstrating that the original studies are not robust.” 

“[T[he conventional wisdom about the impact of taxes on economic growth,” Pjesky concluded, “rests on a weak foundation.” 

All told, years of peer-reviewed econometric studies of the relationship between taxes and economic growth have produced “contradictory and unstable results,” the TPC researchers note, leaving no consensus among economists.