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Investing in the Future:
The Role of Taxes and Education
in States’ Economic Growth
Richard G. Sims
Sierra Institute on Applied Economics
Lincoln, NE
January 2007
A Brief Overview
of state and local
tax effort by
income category
Richard G. Sims
Sierra Institute on Applied Economics
What Public Policies
Influence State Economic
Growth?
Richard G. Sims
Sierra Institute on Applied Economics
Do low
business taxes
lead to
economic
growth?
Richard G. Sims
Sierra Institute on Applied Economics
Chart A: The 10 Fastest Growing States’ Corporate
Income Tax Rates: Average 7.1%
10 FASTEST PER CAPITA U.S. RANK TOP U.S. RANK
GROWING PERSONAL (High to CORPORATE (Low to
STATES INCOME Low) TAX RATE High)
GROWTH
1995-2003
Wyoming 5.4% 1 No tax Tied 1st
District of 5.2% 2 9.975% 48
Columbia
North Dakota 5.0% 3 10.50% 50
Vermont 4.8% 4 9.75% 46
Massachusetts 4.7% 5 9.50% 45
South Dakota 4.7% 6 No tax Tied 1st
Minnesota 4.6% 7 9.80% 47
Colorado 4.6% 8 4.63% 8
Maine 4.5% 9 8.93% 40
Nebraska 4.5% 10 7.81% 31
AVERAGE: 7.1%
NOTE: States in italic are "no income tax" states; Rates are in percent and are those in place
1/1/2004. Richard G. Sims
SOURCE: Income data from U.S. Department of Commerce, Bureau of Economic Analysis; tax
Sierra Institute on Applied Economics
rates from Federation of Tax Administrators, www.taxadmin.org.
Chart B: The 10 Slowest Growth States’ Corporate
Income Tax Rates: Average 6.25%
10 SLOWEST PER CAPITA U.S. RANK TOP CORPORATE U.S. RANK
GROWING STATES PERSONAL (High to TAX RATE (Low to High)
INCOME GROWTH Low)
1995-2003
Delaware 3.8% 42 8.7% 38
Oregon 3.8% 43 6.6% 21
Indiana 3.7% 44 8.5% 35
Idaho 3.7% 45 7.6% 29
North Carolina 3.7% 46 6.9% 23
Ohio 3.6% 47 8.5% 37
Michigan 3.3% 48 No tax 1
Alaska 3.3% 49 9.4% 44
Nevada 3.1% 50 No tax 2
Hawaii 2.5% 51 6.4% 17
AVERAGE: 6.25%
NOTE: States in italic are "no income tax" states; Rates are those in place 1/1/2004.
SOURCE: Income data from U.S. Department of Commerce, Bureau of Economic Analysis; tax Richard G. Sims
rates from Federation of Tax Administrators, www.taxadmin.org. Sierra Institute on Applied Economics
In fact-
High growth states actually had
comparatively high average
corporate income tax rates.
Slow growth states had corporate tax
rates below the U.S. average.
Richard G. Sims
Sierra Institute on Applied Economics
In addition, the Actual Effective
Rates that Corporations pay on
their Profits has Declined
Substantially Over the Last
Several Years…
Richard G. Sims
Sierra Institute on Applied Economics
Effective Rates of State Income
8%
Taxes
7.5%
7% Corporate Taxes Individual
taxes paid to
6% states as % of
U.S. individual
income
5% 3.2%
4% Corporate
taxes paid to
3% states as % of
"pre-tax"
corporate
2% profits
1.8% 2.1%
1% Individual Taxes
0%
2000
1982
1984
1986
1988
1990
1992
1994
1996
1998
Source: Data from Federation of Tax Administrators and the U.S. Department of Commerce.
Richard G. Sims
Sierra Institute on Applied Economics
But doesn’t being “Business Tax
Friendly” or being seen as
having a favorable Business
Climate encourage a states
economic growth?
Let’s see--
Richard G. Sims
Sierra Institute on Applied Economics
Chart A: States ranked MOST ‘Business Tax
Friendly’
Tax Foundation Rankings
10 MOST ‘TAX U.S. RANK PERSONAL INCOME U.S.
FRIENDLY’ ‘TAX INCREASE RANK
STATES FRIENDLY’ 1994-2003
South Dakota 1 4.7% 6
Florida 2 3.9% 38
Alaska 3 3.3% 49
Texas 4 4.3% 14
New Hampshire 5 4.4% 11
Nevada 6 3.1% 50
Wyoming 7 5.4% 1
Colorado 8 4.6% 8
Washington 9 4.3% 17
Oregon 10 3.8% 43
TOP 10 AVERAGE: 4.2%
SOURCE: Tax Foundation, Inc.,State Business Tax Climate Index
Richard G. Sims
Sierra Institute on Applied Economics
Chart B: States ranked LEAST ‘Business Tax
Friendly
10 LEAST ‘TAX U.S. RANK PERSONAL INCOME U.S. RANK
FRIENDLY’ STATES ‘TAX INCREASE
FRIENDLY’ 1994-2003
Maine 42 4.5% 9
Arkansas 43 3.8% 40
Kentucky 44 4.2% 24
Vermont 45 4.8% 4
Rhode Island 46 4.2% 22
West Virginia 47 4.0% 34
Minnesota 48 4.6% 7
New York 49 4.0% 32
Hawaii 50 2.5% 51
District of Columbia 51 5.2% 2
BOTTOM 10 AVERAGE: 4.2%
SOURCE: Tax Foundation, Inc.,State Business Tax Climate Index
Richard G. Sims
Sierra Institute on Applied Economics
Over the last decade there was no
difference in average growth in the
most top 10 most “business tax
friendly” and the 10 least friendly
states.
As for “Business Climate”…
Richard G. Sims
Sierra Institute on Applied Economics
Site Selection
Magazine,
November,
2006
2006 Top State Business Climate Rankings
Climate 25 Top Ranked Rank in Pers Inc growth
Rank States 1994-04
1 North Carolina 39
2 Texas 12 top half
3 Ohio 47 bottom ten Only 7 of the Top Ranked 25
4 Georgia 43 bottom ten states grew as fast a the US
6 Indiana 46 bottom ten
6 Tennessee 37
average-
7 Kentucky 31
Only 2 of the Top Ranked
8 Alabama 19 top half
9 Michigan 48 bottom ten states were in the top 10 growth
10 South Carolina 34 states-
11 Florida 24 top half
12 Illinois 42 bottom ten 7 of the Top Ranked states
12 Virginia 13 top half were among the 10 slowest
14 New York 29
growing states.
15 Mississippi 36
16 Pennsylvania 30
17 Iowa 27
17 Louisiana 51 bottom ten
18 California 16 top half
19 Nevada 44 bottom ten
20 Arkansas 35
22 Kansas 26
23 Minnesota 9 top half Site Selection magazine, Nov. 2006; Bureau of
Labor Statistics website; calculations by the
24 Oklahoma 8 top half author.
25 Arizona 25
One Reason Corporate Income
Taxes Don’t Have Much Influence
on State’s Comparative Growth-
Rates Don’t Vary Greatly from
State-to-State--
Richard G. Sims
Sierra Institute on Applied Economics
State Corporate Income Tax Rates
¾ of states have rates between 6%-9% I
O
14
Maximum Corporate Tax Rate
W
Mid-Point A
12
7.5%
10
M
I W I
8 L I N
L S N
I C E
6 S
N O
O N O
4 I S T
S I A
N
2
0
KS CO MS S C UT FL G A O K V A MO HI AL AR TN O R MT NC AZ MD IL CT NY ID NM NE WI LA KY IN NH O H DE CA ME NJ RI WV AK MA V T MN DC P A ND IA
The 45 States with a Corporate Income Tax
Richard G. Sims
Sierra Institute on Applied Economics
Another Reason Corporate
Income Taxes Don’t
Determine a State Economic
Growth…
Richard G. Sims
Sierra Institute on Applied Economics
Shares of Total Business Costs
State
Direct Labor
Corporate
60% 48.0%
Income Taxes
0.27%
50%
40%
30%
20%
10%
0%
Richard G. Sims
Source: U.S. Department of Commerce, National Income and Product Accounts, 2003.
Sierra Institute on Applied Economics
What Firms Say Are Their Major Cost
Considerations When Relocating
Source: Robert M. Ady, “The Effects of State and Local Public Services on Economic Development,” New England Economic
Review, March/April, 1997.
Richard G. Sims
Sierra Institute on Applied Economics
State and Local taxes on business
earnings represents a very small
part of total business expenditures.
Labor, on the other hand,
constitutes about half of business’
total outlay.
Richard G. Sims
Sierra Institute on Applied Economics
Similarly, taxes on individuals
don’t appear to determine
states’ growth…
Richard G. Sims
Sierra Institute on Applied Economics
Of the 15 FASTEST Growing States:
--8 above average taxes
In general, --7 below average taxes
states with --4 in lowest 10 taxing states
high --3 in highest 10 taxing states
--4 are no income tax states
economic
Of the 15 SLOWEST Growing States:
growth had --4 above US average taxes
relatively --11 below US average taxes
higher taxes. --5 in 10 lowest taxing states
--1 in highest 10 taxing states
--4 are no income tax states
* Average annual growth in per capita personal income data from Bureau of Economic Analysis.
** Tax Rates and Tax Burdens: In the District of Columbia - A Nationwide Comparsion 2002, Government of the
Richard G. Sims
District of Columbia, August 2003.
Sierra Institute on Applied Economics
Taxes on Top Income Earners
10 States with highest 10 States with lowest
taxes on top earners tax on top earners
Avg. tax rate: 9.4% Avg. tax rate: 2.9%
10-year growth: 4.3% 10-year growth: 4.1%
But isn’t small government a
good thing?
Government Share of the Economy
Richard G. Sims
Sierra Institute on Applied Economics
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Sierra Institute on Applied Economics
Richard G. Sims
Surprising?
“Contrary to traditional beliefs, the net national costs of government social
programs are virtually zero… Contrary to the intuition of many economists
and the ideology of many politicians, social spending has contributed to, rather
than inhibited, economic growth.”
Peter H. Lindert, Distinguished Professor of Economics, University of
California, Davis in Growing Public: Social Spending and Economic Growth
since the Eighteenth Century.
So, What does cause growth?
Elementary & Secondary Spending
TOP 10 U.S. RANK PERSONAL BOTTOM 10 U.S. RANK PERSONAL
STATES IN K-12 INCOME STATES IN K-12 INCOME
EDUCATION SPENDING GROWTH PER EDUCATION SPENDING GROWTH PER
SPENDING PER CAPITA CAPITA SPENDING PER CAPITA CAPITA
1995-2003 1995-2003
Alaska 1 3.3% Idaho 42 3.7%
New Jersey 2 4.4% Utah 43 4.0%
New York 3 4.0% Florida 44 3.9%
DC 4 5.2% Louisiana 45 4.0%
Connecticut 5 4.3% Mississippi 46 4.1%
Wyoming 6 5.4% Arizona 47 3.8%
Michigan 7 3.3% Tennessee 48 3.9%
Minnesota 8 4.6% Kentucky 49 4.2%
Wisconsin 9 4.2% Arkansas 50 3.8%
Vermont 10 4.8% Hawaii 51 2.5%
TOP 10 AVERAGE BOTTOM 10 AVERAGE
INCOME GROWTH
4.3% INCOME GROWTH 3.8%
Average growth for the 50 states and DC: 4.1%
SOURCE: Education spending data from National Center for Education Statistics, http://nces.ed.gov; income data from U.S. Bureau of the Census, Bureau of Economic Analysis.
How you fund education matters
Heavy reliance on sales and excise
taxes constrain state’s ability to fund
future services, many of which are
crucial to economic growth and
development.
ELAST ICIT IE$
How revenues grow over time determines
states’ ability to fund future services-
Typical Long-Term 50 State Averages
Personal Income Tax 1.04
Corporate Income Tax 0.95
Sales Taxes 0.97
These all grow slower
Property Taxes 0.96 than the economy
Cigarettes (avg. all states) 0.48
Lottery (avg. all states) 0.52
Richard G. Sims
Sierra Institute on Applied Economics
A look at economic interaction
between taxes, spending and
state economic growth.
A Dynamic General Equilibrium
Analysis of a Balanced Budget Tax
and Spending Increase
What if Illinois raised personal income taxes by $2 billion*
...and spent all of the new revenues for k-12 education?
2006 2007 2008 2009 2010
Employment (Thous) 26 26 26 26 27
Gross State Product (Billions) 1.3 1.4 1.4 1.5 1.6
Pers Inc (Billions) 1.1 1.2 1.3 1.5 1.6
* Assumes funding from a 5% flat rate with $12,000 personal exemption and $5,000 dependent exemption.
Results based on a computable general equilbrium analysis, assuming new revenues are spent in
proportions similar to current spending.
Richard G. Sims
Sierra Institute on Applied Economics
“I know of no valid economic theory
that suggests that tax cuts provide
more economic stimulation than
would a similar amount of
government spending.”
Former Congressional Budget Office Director, Robert
Reischauer
Richard G. Sims
Sierra Institute on Applied Economics
“Rather than playing the blame
game, we must focus on helping
workers move up the economic
ladder. The best approach is to
give people access to first-rate
education so they can acquire the
skills needed to advance.”
Treasury Secretary Henry Paulson, July 30th, 2006
Richard G. Sims
Sierra Institute on Applied Economics
So, why does education spending have
such a large impact on job creation?
Near-Term:
-Labor intensity
-Local purchase intensity
-Larger share of total business costs
Long-Term:
-Amenity value
-Source of productivity
-Source of competitiveness
Richard G. Sims
Sierra Institute on Applied Economics
A Concern for Nebraska’s Future
Over the last decade Nebraska lost
39,800 college graduates to other
states.
Richard G. Sims
Sierra Institute on Applied Economics
CONCLUSIONS
Low taxes are not the key to creating
jobs and income in a state.
Low taxes are associated with low
levels of public services.
Spending on K-12 education can be a
significant contributor to economic
growth.
Richard G. Sims
Sierra Institute on Applied Economics
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