New Study: higher tax burden reduces state economic growth & population

August, 2014 – We consistently hear Rhode Island lawmakers claim that citizens or the wealthy can “afford” some minor, new tax to pay for some new government project. That may be true in some cases.

But what is also true, in almost all cases, is that OUR STATE’S ECONOMY CANNOT AFFORD THE TAX HIKES.

A new study by the nationally renowned Mercatus Center explains this cause and effect.

***

Read below or go to the Mercatus page here; http://mercatus.org/publication/state-economic-prosperity-and-taxation

State Economic Prosperity and Taxation

Pavel A. Yakovlev | Jul 10, 2014

Policymakers frequently debate how different methods of taxation affect their states’ economies. While most economists agree that higher taxes result in reduced investment and innovation, previous studies have not found overwhelming evidence that higher tax rates lead to lower eco­nomic growth.

To untangle this paradox, new research by economist Pavel Yakovlev for the Mercatus Center at George Mason University examines the effects of taxation on states’ economic performance, busi­nesses growth, and net migration rates. The study finds that higher state taxes correlate with lower economic performance, even when controlling for various factors. The magnitude and sig­nificance of this effect varies depending on the type of taxes and the type of economic activity in question. The study analyzes the relationship between states’ economic performance and tax variables including effective average tax rates, the personal income tax, and personal income tax progressivity.

To read the study in its entirety, please see “State Economic Prosperity and Taxation.”

KEY FINDINGS

  • A higher average tax burden reduces state economic growth. Dividing total tax revenue by gross state product (GSP) shows that a 1 percent increase in a state’s average tax rate is associated with a decrease of 1.9 percent in the growth rate of its GSP.
  • Taxes impact migration patterns. If higher state taxes lead to lower economic activity and employment, it is conceivable that people will move to states with better economic pro­spects. Of the nine states with no personal income tax, four—Florida, Nevada, Washington, and Tennessee—are among the states with the highest population growth rates in the country in recent decades. Also, data show that a higher personal income tax rate is associ­ated with a higher probability of residents migrating to a state with a lower tax rates.
  • Income tax progressivity affects the number of new firms. The number of new firms open­ing in a state is a key indicator of beneficial creative destruction and innovation that will improve living standards for the state’s residents over time. Other studies have found that new firm entry accounts for 20–50 percent of a state’s overall productivity growth. The lat­est economic data show that the rate of start-up creation is sensitive to personal income tax progressivity. A 1 percent increase in personal income tax progressivity is associated with a reduction of 1.2 percent in the growth rate of the number of firms.
  • While the data show an important relationship between GSP growth and average tax rates, the impact of average tax rates on per capita income is less clear. A 1 percent increase in a state’s average tax rate can be expected to decrease per capita income by 0.07 percent.
  • As previous studies have also noted, these findings can be sensitive to the time period, statisti­cal methods, and variables used. Nevertheless, the results still lead to a general con­clusion: not all tax variables exhibit a significant correlation with the selected measures of economic activity, but when they do, the relationship is usually negative.

CONCLUSION

Higher state taxes generally reduce state economic growth, GSP, and even population. It is clear that people produce or consume less, or even move to a different state, in response to higher taxes. Not all types of tax increases can be expected to significantly harm economic outcomes, but higher taxes are generally correlated with lower standards of living.

Read Publication PDF

Rhode Island: A Growing Population in an Abysmal Economy

The U.S. Census is out, today, with updated estimates for the populations of each state.  The real telling data will come next month, when the Census releases the more detailed results about immigration, births, deaths, and age brackets.

Nonetheless, the buzz has begun, because 2013’s small population increase follows eight years during which Rhode Island’s population declined; this decade, it was the only state to have that result twice in a row.  That potentially positive result comes with some important caveats, however.

The Census changed methodologies, this year.  Because the change applied evenly across the states, there isn’t any obvious reason why it should have affected the Ocean State differently.  On the other hand, if it turns out that the agency captured a particular group more precisely and Rhode Island’s peculiarities make that group more significant, it could have made the numbers not entirely comparable from year to year.

The Ocean State is still estimated to be below its 2010 Census count.  In fact, it’s one of only two states of which that’s true, and is many times worse off than Maine, which barely edged into the category this year.

Rhode Island is still in the bottom 10, with year-over-year growth one-seventh the size of the national average. Our economy, our retirement systems, and our social institutions rely to some extent on a certain amount of growth.  In that regard, growth below that amount is tantamount to a decrease in its effect.

Policy differences make it telling which states are on the other end of the rankings.  One reason that state population growth rankings are an important indicator is that it gives some idea which sorts of policies attract immigrants, give retirees a reason to stay put, and make young families optimistic enough to have babies.  The following chart shows the states ranked by their year-over-year percentage increases.

USstates-popchange-2012-2013

A growing population isn’t necessarily a good thing in conjunction with other data. Every month, we’ve tracked the shrinking of Rhode Island’s labor force; that’s the total number of Rhode Islanders who are either working or actively looking for work.  If Rhode Island’s population is growing but fewer people are participating in the state’s workforce, then there are more people who aren’t contributing to the state’s economic output. There are also potentially more people who are taking advantage of government programs, for which money must be taken out of the economy.

The population casts a dark light on Rhode Island’s unemployment rate. For November, Rhode Island was tied with Nevada for the worst unemployment rate in the country.  The unemployment rate is the percentage of people who are counted within the labor force and who say that they are not employed.  In stark contrast to Rhode Island, Nevada is on the right side of the above chart, indicating that its population is growing relatively quickly.  In other words, Nevada’s unemployment rate is more an indication that it’s having to find work for a growing number of people; that’s a much more optimistic way to be tied for last place in unemployment than Rhode Island’s perpetual stagnation and decline.

RI Only State Losing Population Two Years in a Row

Quick Links: see larger out-migration report here

Since the U.S. Census department released its latest state-by-state population estimates, it has been widely reported that Rhode Island was one of only two states to lose population from 2011 to 2012.  The other was Vermont.

However, as with the RI Center for Freedom & Prosperity’s findings in September, looking more deeply reveals that the headlines actually understate Rhode Island’s poor position.

In total, Rhode Island lost 354 people, or 0.03% of the 1,050,646 estimated to have lived here in 2011. As bad as that is, it looks preferable to the 581 whom Vermont lost, which was 0.09% of that state’s population. Two considerations smudge that silver lining.

As a percentage of population, most of the difference was in the higher number of births in Rhode Island: 1.02% of population versus 0.92% in Vermont.  To some extent, that’s a positive finding, but it’s only significant because Rhode Island offset more of the residents who moved to other states (0.51% of population, to VT’s 0.28%) with higher immigration from other countries (0.34%, to VT’s 0.10%).

The second smudge is that this year is Rhode Island’s second on the population-loss list.  Last year, its company wasn’t Vermont, but Michigan.  Over the two-year span, from 2010 to 2012, Vermont’s population has grown; over the last year, Michigan made up most of its loss from the year before.

Uniquely, Rhode Island is still slipping, with a two-year net loss of 2,275 people.  Of course, international immigration and a natural increase (with births outnumbering deaths) soften the blow. Since 2010, 1.26% of Rhode Island’s population — 13,259 people — have left for other states. As with the other numbers presented, here, that’s a net number, meaning it’s the number of Rhode Islanders who left above and beyond the number of people who moved here.

It’s true that Rhode Island is the second most densely populated state in the nation, after New Jersey, so a rapidly growing population might be problematic in the long term.  Be that as it may, multi-year trends of losing population — especially losing established Rhode Islanders to other states — is a symptom of a state in need of dramatic turnaround.

RI out-Migration to border Counties in MA and CT

County Out-Migration Should Be Alarm to Municipalities

For nearly a decade, taxpayers have been leaving Rhode Island. With cities and towns facing wave after wave of difficult decisions, a change of policy course is critical. Between 2003 and 2010, the net migration out of the state has left Rhode Island with 24,455 fewer income-tax-paying households with a total of $1.2 billion of annual income.