The evidence supports ditching the state income tax

Should Georgia’s lawmakers revamp our tax code? That depends. Do you want a state with a better chance at growing jobs1 and the economy?

If you said “yes,” the case for emulating those states that have ditched their income taxes is strong. In fact, it’s hard to consider the facts and argue otherwise.

Let’s first stipulate that taxes of any kind are but one factor in economic growth. Regulations (or lack of excessive ones), natural resources, infrastructure and intellectual capital are also crucial.

Still, taxes are one of the clearest, broadest, most objective points of comparison that individuals or businesses can use to differentiate among states. And it’s clear from the data that, on any number of economic bases, states with no income taxes outperform those with high income taxes.

There are nine states that, since at least 2000, have levied no tax on earned income (two of them, New Hampshire and Tennessee, do tax investment income). Looking for the clearest comparison, over the longest period of time possible in a policy area that sees frequent changes, I found seven states and the District of Columbia have consistently had the highest marginal income-tax rates since 2004. Go beyond that, in the number of states or years, and the list becomes hopelessly muddled.

Then I looked for data to address the questions I think most people would ask during this kind of exercise. Which states have the fastest economic growth? In which have the most jobs been created? In which do people earn the most money? Which are producing the best-educated graduates? Which states are attracting successful people?

Comparing the no-income-tax (no-IT) states with the highest-income-tax (high-IT) states from 2004 onward, I found there’s really no comparison.

  • The no-IT states have averaged an annual growth rate of 1.67 percent, compared to 1.32 percent for the high-IT states. If that doesn't sound like much of a difference, consider that it means the no-IT states' economies would double in size about 11 years sooner than those of the high-IT states. (Both groups beat Georgia's mark of 0.74 percent.)
  • The high-IT states have higher median household incomes on average. But they also tend to have higher costs of living: On purely financial terms, would you be better off making $30,000 in San Francisco or in Sioux Falls? After we adjust for cost of living, the median household income in the no-IT states turns out to be more than 10 percent higher than in the high-IT states. (Georgia's mark lies in between but is closer to that of the no-IT states.)
  • The biggest disparity is in job growth. From January 2004 until this past June, the most recent month for which state-level data are available, no-IT states experienced cumulative job growth of 9.7 percent. The high-IT states? Just 2.1 percent. (Georgia's rate was 3.6 percent.)
  • One area in which the high-IT states definitely beat the no-IT states is in education spending per pupil: They spend about 17 percent more (and their gap with Georgia is even wider). Unfortunately for them, their higher spending hasn't brought results. On the National Assessment of Educational Progress, the gold-standard of such tests, the no-IT states averaged higher scores on the benchmark fourth- and eighth-grade tests for both math and reading. (Georgia trailed both groups in math and pretty much tied the high-IT states on reading.)
  • We can also see people voting with their feet. Not only are the no-IT states' populations growing more than twice as fast as those of the high-IT states, but their growth has also been much more lucrative. In his review of IRS data for people moving between states, author Travis H. Brown found the no-IT states have added more than $164 billion in adjusted gross income while the high-IT states have lost a whopping $64 billion in AGI. (Georgia gained almost $16 billion in AGI.)

Given the way these groups compare to each other, and to Georgia, it appears we could benefit from at least moving toward the no-IT states. Even if we don’t make it all the way to zero income tax, we would move in the right direction.