“The president has proposed raising taxes for job creators,” said Mitt Romney, the Republican presidential nominee. “I will cut taxes for job creators.”
Gov. John Kasich, R-Ohio, and Gov. Chris Christie, R-N.J., have similarly criticized the president for his proposed tax increases on the rich.
They’ve also called for cuts to income taxes in their own states. Even I supported a similar idea in my column, “Abolish state income tax,” an idea I’ve since abandoned.
As it happens, many U.S. states have economies the size of European countries.
California for example has a gross domestic product of $1.9 trillion, while Italy has a GDP of two trillion by 2010 estimates, which makes it equally prudent to compare U.S. states in a discussion of income taxes as it does to compare the U.S. with other countries.
Currently there are seven states that do not levy income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Likewise, New Hampshire and Tennessee could be included since they do not tax labor income, but I’ve kept them out of the equation since they both tax capital income.
In contrast, the states with the highest income taxes are New York (8.82 percent), Vermont (8.95 percent), New Jersey (8.97 percent), Iowa (8.98 percent), Oregon (9.9 percent), California (10.3 percent) and Hawaii (11 percent), according to the Tax Foundation, a nonpartisan think-tank.
How have these different approaches to tax policy worked?
The median unemployment rate for states with the highest taxes on personal income is 8.7 percent, while those without have a median unemployment rate of 7.7 percent.
The 1 percent difference, which is lower and matters for the 1 percent fewer individuals who aren’t unemployed, doesn’t say much for the idea that lower taxes lead to economic booms.
State tax policy will always be subordinate, yet not irrelevant, compared to U.S. tax policy. This is why it matters to businesses who wins the presidency, more so than it does who wins the 11 gubernatorial races this election cycle.
However, there are further consequences to the decision to lower or eliminate state income taxes.
“States without an income tax have higher sales or property taxes, on average, than states with an income tax,” a March 22 report by the Center for Budget and Policy Priorities said.
The report showed state governments that did not levy income taxes found the revenue by other means, which is why state tax policy can be tricky.
“The money trickles in from beach tourists a quarter at a time, eventually adding up to an extra $870,000 a year for Tybee Island’s city government — all from parking meters and parking tickets,” reported The Augusta Chronicle in a July 2011 article.
In fact when Romney was governor of Massachusetts that is how he fixed a budget shortfall (since almost all states are required to have balanced budgets); he raised fees, approximately $240 million worth, an estimate provided by the Romney campaign for a report by NPR, which was broadcast December 14, 2011.
Romney is telling the truth when he says he will cut taxes for job creators. Fees, well, that’s another story.