State taxes and economic growth revisited: have distortions changed?: Fid-Bau Portal

State taxes and economic growth revisited: have distortions changed?

Deskins, John / Hill, Brian

Abstract Our focus is on the changing degree to which individuals and firms respond to state tax policy in the United States. If the economic environment of the past two decades has changed such that firms and individuals have greater mobility, the degree to which they act to avoid higher tax jurisdictions may be enhanced. Alternatively, if tax policies across states have converged, the responsiveness of economic activity to tax policy may have diminished. These potential dynamics may be manifest in, among other ways, a change in the degree to which variation in overall state tax burdens affect state economic growth. Results from a series of regressions using a panel of state-level data for the years 1985 through 2003 indicate that the degree to which higher tax burdens reduce economic growth has substantially diminished. For instance, results indicate that the negative effect of a $1,000 increase in state own-source revenues per capita had on the growth rate of private sector gross state product diminished from approximately negative 1.1 percentage-points in 1985 to virtually zero by 2003. This effect holds whether economic growth is measured as the growth rate of private sector gross state product or private sector employment in a state, whether tax collections are measured in inflation-adjusted per capita terms or as a share of state personal income, and whether we examine state taxes exclusively or combined state and local taxes.