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Despite Claims, Studies Don’t Agree That State Tax Cuts Boost Growth

In recent testimony to the North Carolina legislature supporting tax cuts, the Tax Foundation asserted that “rarely does empirical economic literature speak so strongly in unison as it does about the effect of taxes on economic growth.”  But that assertion is simply false, at least with respect to the literature on the effect of state and local taxes on state economic growth.  There’s no clear research evidence that lower taxes help state economies grow, as our new paper explains.  With tax cut proponents making similar claims in states across the country — and as North Carolina’s Senate considers a damaging tax cut plan this week — it’s important to set the record straight.

We’ve taken a closer look at the Tax Foundation’s recent review of the economic literature on the impact of taxes on economic growth — the basis for its statement to the North Carolina legislature.  (We did not look at the national-level tax studies they cited, although these

surveys show that their claims here are equally suspect.)  We found that:
  • The Tax Foundation mischaracterized or exaggerated the findings of three of the seven articles it cited, and the conclusions of a fourth article it cited are contradicted by a much more recent paper by the exact same author (which the Tax Foundation failed to include in its review).
  • The Tax Foundation omitted from its review at least 20 relevant articles that have been published in major journals or edited compilations since the beginning of 2000, 18 of which either conclude that state and local tax levels have essentially no effect on various measures of state economic performance or suggest that adverse impacts are minimal or limited to particular taxes or time periods.

Some studies by reputable economists find that above-average state and local taxes have a measurable and consistently adverse impact on state economic performance.  However, many equally reputable studies reach the opposite conclusion, and the results of many more are mixed, ambivalent, or show that any adverse impacts are small.  There’s simply no consensus that cutting taxes is a good strategy to boost state economic growth and create jobs.

Click here to read the full paper.