NC Budget and Tax Center

States with Personal Income Taxes Still Outperforming States without Such a Tax

A 2013 report released by the Institute on Taxation and Economic Policy (ITEP) updates analysis showing that states that levy a personal income tax are experiencing conditions on par with, if not better than, states with no personal income tax. One of the central claims from proponents of cutting or repealing the state personal income tax is that states without a personal income tax outperform states with such a tax. The ITEP report highlights that this claim is not true.

ITEP compares several economic metrics for nine states with no personal income tax and nine “high rate” states chosen by Arthur Laffer, the architect of the tax plan supported by Senate leadership. The ITEP report finds that the nine “high rate” states have on average seen more economic growth per capita over the last decade than the nine states without a broad-based personal income tax. Furthermore, inflation-adjusted median household income growth, which declined in most states over the last decade, was slightly smaller in states with income taxes compared to states without such a tax. Moreover, the report highlights that the average unemployment rate has been nearly identical across states that do not levy a personal income tax, “high rate” states as well as the broader group of 41 states that levy an income tax. 

As policymakers aim to modernize the state’s tax system in 2013, cutting or eliminating the personal income tax not only doesn’t address the problems with the current system but also will not solve the state’s economic challenges. The latest ITEP report adds to the empirical evidence that indicates cutting taxes does not naturally lead to economic growth. Promoting economic opportunity for all North Carolinians requires a tax system that allows policymakers to make adequate investments in education, infrastructure, hospitals, public safety and other public services that serve as the foundation for economic growth. Cutting or eliminating the personal income tax would represent a step backwards, not forward, for North Carolina.

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