NC Budget and Tax Center

Growth lags in tax cutting states

Once again, sober analysis shows that tax cuts don’t create prosperity. A report out today looks at how states that cut personal income taxes have fared in the years that follow; the answer is, not that well. Bold promises about tax cuts are usually followed by harsh realities. Here are a few of the key results:

  • Job growth slower than the nation in 4 of the 5 largest tax cutting states in recent years. North Carolina is actually the one state that did outperform the nation since the recent tax cuts, but that means that its not the tax cuts that are doing the work. For example, Kansas passed even larger tax cuts that North Carolina did, and it has lagged behind the nation, and behind most of its neighbor states, since then.
  • Personal income grew more slowly in 4 of the 5 states that cut personal income taxes the most in the last few years. Even with anemic income growth nationally, most of the states that cut personal income taxes were sub-par performers. This includes North Carolina, where the average worker has seen the value of their wages slip further behind the national average.
  • The five states that cut taxes the most aggressively in the 1990s did worse than the rest of the country during the next economic expansion (2000-2007). Some tax cut cheerleaders say we simply need to be patient, that the good times will come, but that not what the data say. States that cut heavily in the 1990’s saw an entire economic cycle come and go without growth taking off.

Of course, none of this is a surprise to people who pay attention to history. Most rigorous studies have found that cutting state taxes has little or no effect on economic growth. Businesses are worried about a long list of costs before they consider the personal income tax rate, so its not a game changer for where they decide to invest. Likewise, people don’t suddenly decide to work harder because they stand to earn a few more cents on the dollar, particularly if they have to pay most of that back in higher sales taxes, worse schools, or deteriorating roads. Cutting personal income taxes in not a magic elixir, but expecting it to cause an economic boom is magical thinking.

2 Comments


  1. NC Darlin

    May 15, 2015 at 1:16 pm

    It is truly sad we have cut taxes in our state, especially since it all goes to the rich and corporations? We need to take back the state for the little guy!

  2. LayintheSmakDown

    May 16, 2015 at 9:42 am

    I love it! You attempt to degrade tax cuts, but then show that North Carolina is doing a great job. And your third point has little to do with anything so I am not sure why it is there, I am sure there can be a point on the states that increased taxes aggressively too. One that comes to mind is the flight of people from those states to low tax states like NC. At least that seems to be the reason a lot of the people I have come into contact in the Congregating Area for Relocated Yankees give as a primary reason other than good job opportunities.

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