9 states have the right idea about taxation | Azcentral.com

By: Robert Robb

Over a decade, 48 percent of all job growth in the United States occurred in just nine states.

What did these states have in common? They are the nine states in the country that do not have a personal income tax.

That astonishing datum should be a bit of shock therapy in Arizona, where the discussion about how to achieve economic growth has gotten unproductive and distressingly misguided.

It’s not that these nine states are bigger than other states, and that explains why they got the lion’s share of the job growth. From 2001-2010, these states nabbed nearly half the nation’s job creation while constituting, at the end of the decade, just 20 percent of the country’s population.

Although, during the decade, they did add population considerably faster than the national average, as the country experienced a substantial migration from high-tax states to low-tax states.

This phenomenon is explored in greater depth in a recent study for the American Legislative Exchange Council, “Rich States, Poor States,” by Arthur Laffer, Stephen Moore and Jonathan Williams.

In contrast with the nine states without personal income taxes, the nine states with the highest rates had considerably slower population growth than the rest of the country and lost jobs over the decade.

This is not an argument for Arizona to abolish its personal income tax, although that would be good as a long-term goal.

Arizona’s current tax and regulatory structure is conducive to economic growth. Our job-growth rate during this period was fully competitive with the no-tax states, despite suffering from the bursting of the housing bubble at the end of it. Laffer develops a forward-looking competitiveness index to evaluate how state economies are likely to fare in the future. Arizona ranks ninth-highest.

Moreover, economic growth isn’t the only purpose of a polity. I think Arizona state government is underfunded, and I opposed the last round of tax cuts for that reason.

But to the extent the question is how to achieve economic growth, the answer is to get the fundamentals right. Arizona’s fundamentals are relatively sound. But we are losing sight of how much that matters and becoming focused, and lost, in things that don’t really matter.

Job growth over the past decade didn’t go to the states whose economic-development bureaucrats had the most and best tools in their toolboxes. Job growth didn’t go to those states with the biggest corporate give-away programs. Job growth went to those states that allow every resident to keep more of what they make.

The discussion of economic growth in Arizona is hampered and polluted by misconceptions, myths and illusions.

Arizona does not have a real-estate-dependent, low-wage economy. A real-estate-dependent economy isn’t possible, because real estate doesn’t create its own demand. Something else drives the demand for real-estate development. And if you look at cost-of-living adjusted wages and not per capita income, which is hugely influenced by demography, the Phoenix area does fine compared with other big cities.

Economic growth doesn’t come from importing capital and exporting goods. This mercantilist fallacy was disproved for nations centuries ago by Adam Smith and David Ricardo. That it should reappear today as an explanation for state economic growth is intellectually bizarre.

All voluntary trade creates wealth, intraregional as much as inter-regional. And importing goods of higher quality or lower cost improves living standards just as much as exporting the same to other regions.

Economic growth isn’t driven by corporate incentives. If the fundamentals are sound, such incentives for the most part subsidize job creation that would have occurred anyway.

What’s most distressing is that a supposedly “tea party” Republican Legislature is acting on these misconceptions, myths and illusions and leaping deeply into the quicksand of industrial policy.

Arizona’s economic fundamentals are still generally sound. But there’s reason to worry that policy makers are becoming too enamored of baubles.

This article was originally posted at Azcentral.com by Robert Robb on February 7, 2013.