Tax Reform

Taxes Matter—Yes, in Georgia Too

With gridlock continuing to delay the first fundamental federal tax reform since 1986, states are leading the way. Recognizing that tax policy has the power to make or break an economy, nearly half the states have significantly cut taxes over the last seven years. Georgia lawmakers sought to keep with spirit by seeking to flatten the income tax brackets and enact broad tax relief.

Unsurprisingly, advocates for higher spending and taxes at the Georgia Budget and Policy Institute (GBPI) recently lambasted this proposal, claiming that “mainstream economic research or evidence from other states” does not support the idea that “tweaking Georgia’s tax rate is a sound approach to economic health.” But not only does this tax reform extend beyond mere “tweaking,” empirical evidence does indeed indicate tax reform and tax rate reductions are both related to economic growth. In addition, The Tax Foundation conducted an intensive survey of 26 peer-reviewed studies published since 1983 regarding the relationship between taxes and economic growth. Of these studies, 23 found a negative relationship between taxes and economic growth; the remaining three found no relationship at all. Honing in on particular aspects of taxation, economists at the Organization for Economic Co-operation and Development (OECD) found that progressivity of income taxes is associated with slower economic growth. And a 21-nation data analysis by OECD researchers found that taxes on productivity and capital were among the most harmful to economic growth. Tax rates and components indeed affect economic conditions.

Evidence from the states may be even more revealing than this compilation of economic literature. Consider North Carolina. Beginning in 2013, former Governor Pat McCrory and the state legislature cut taxes by an astonishing $4.7 billion by the end of 2016. Under current law, the total tax cut on North Carolinians’ earnings will top $6 billion by 2020. The reforms included reducing personal income taxes for every single individual in the state, lowering the corporate tax to the lowest rate in the country (for states that still levy one) and axing the state’s death tax. North Carolina lawmakers also eliminated many crony carve outs in the tax code, including exemptions to the sales tax, broadening the tax base and evening the playing field. Economic growth, jobs growth and substantial, repeated tax revenue surpluses followed.

Looking at growth in GDP—widely recognized as a comprehensive measure of economic vitality—North Carolina led the nation between 2013 and 2015 at 13.4 percent, eclipsing both its Southeast regional peers and the nation, which both averaged 9.9 percent. But wait, there’s more! North Carolina’s labor force growth in 2015 was five times than the national average, and by October of 2016, the state saw nearly 85,000 new jobs created. The seasonally adjusted unemployment rate has plunged from 8.8 percent statewide (and nearly 20 percent in some rural counties) in January of 2013, to 5 percent in February of this year—one of the fastest decreases in the country over that period. Pro-growth reforms have done much in getting the state back on track. The state’s fiscal health improved as well. North Carolina finished the fiscal year 2015 with a $445 million surplus, fiscal year 2016 with a $425 million surplus and as of February 2017, the State Controller reported a $552 million surplus so far. Each surplus exceeded prior estimates. More jobs and higher-than-expected wage growth fueled increased personal income tax and franchise tax revenues, even with—or because of- these lower rates.

In addition to cutting taxes, North Carolina also held down spending, ensuring that the state would not spend beyond its means. As part of this, the legislature enacted hard spending limits that would help refocus budget discussions on efficiency and performance. Each dollar remaining in the private sector as a result of these budget reforms is another dollar potentially available for investment by the private sector in wealth generating activities. Lawmakers also reformed welfare programs to encourage work and reduced regulatory burdens on businesses. As a result, in just 3 years, the state rocketed from 22nd to 2nd in economic outlook in Rich States, Poor States.

What does this mean for the citizens of the Tar Heel State? Increased revenue allowed the state to increase pay for public employees and lift average teacher pay since 2013 by nearly $10,000 to more than $50,000. This jump of more than 20 percent leads the nation. North Carolina’s total non-farm payroll employment grew 8.7 percent between February 2013 and February 2017, compared to the national average of 7.5 percent. All told, job growth has added more than 300,000 jobs since January 2013, and North Carolina even won the title of the fastest growing economy in the nation, creating more abundant opportunity for millions of residents.

People are voting in support of this economic climate with their feet. The state ranks 3rd nationally in net domestic in-migration, attracting over 640,000 individuals over the past decade.

This is no fluke. The two states with the highest in-migration over the same period, Texas and Florida, levy no personal income tax. Population growth, payroll employment growth, personal income growth, gross state product growth, and state and local tax revenue growth in the 9 states with no personal income tax eclipsed that in the 9 states with the highest tax over the period from 2005-2015. Population growth from 2005 to 2015 was an average of 95.45 percent higher in the 9 states with no personal income tax than in the 9 highest income tax states. Payroll employment growth from 2005 to 2015 was an average of 135.14percent higher in the 9 states with no personal income tax than in the 9 highest income tax states. Personal income growth from 2005 to 2015 was an average of 15.97 percent higher in the 9 states with no personal income tax than in the 9 highest income tax states.

State governments are constantly competing for people and businesses, and North Carolina and the many other states enacting tax reform have done the hard thing, walking down paths so many wrongly decried, but in so doing, lighting the way for others to follow. They have proved not only that taxes harm economic growth, but that the best way to come out on top—to float the boat for every citizen, enhancing opportunity, well-being, and prosperity—is through broad-based, pro-growth tax relief, and sound budget practices.

Advocates for higher taxes and larger government often use misleading or out of context data as a scare tactic with policymakers in other states. For instance, opponents of tax reform often reference the post-tax cut budget shortfall in Kansas without pointing out that inflation-adjusted general fund spending remains near record levels. These distortions of tax reform success stories should not go unchallenged. The data clearly show a very different picture than that which GBPI wants its readers to believe. Tax reform, when done properly, yields a bumper harvest for everyone.  Georgia too could put itself on the path to double-digit growth and a more vibrant economy.  Lawmakers in Georgia should continue to seek pro-growth reforms, and eschew the false narrative pushed by groups like GBPI. Prudent tax and fiscal policies demand tough political decisions. But for the millions of families benefiting from expanded opportunities, more jobs, and increased prosperity, those decisions are paying off.


In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A …

+ Tax Reform In Depth