Many traditionally blue states are beginning to get into the tax-cutting game frequently associated with red states, according a new report by the American Legislative Council (ALEC).
The seventh annual “Rich States, Poor States” report, authored by Art Laffer, Stephen Moore and Jonathan Williams, serves as a complement to state economic outlook rankings released in April, and “deciphers which policies support economic growth, reveals which states are enacting major reforms and predicts what may be in store for 2015,” according to a statement from ALEC.
Thursday’s rankings are based on 15 equally weighted economic variables, ranging from tax rates to labor laws.
Utah took the top spot in the outlook rankings for the seventh consecutive year, while New York fell one spot to come in last place. However, as Laffer pointed out during a conference call with reporters on Tuesday, New York can at least take some solace from the knowledge that “it won’t fall any further.”
Overall, the authors consider that, “2013 was a standout year for tax changes in the states,” with 17 states enacting significant pro-growth tax cuts, far more than in previous years. A number of states persist in going the opposite direction, but “fewer states are occupying the middle ground.” (RELATED: Top 5 Silliest State Tax Hikes)
Among the tax-cutting states, North Carolina and Indiana led the way. North Carolina passed “one of the most significant tax reforms for economic growth in the last decade,” flattening its personal income tax structure, enacting deep cuts in both the personal and corporate income tax rates, and eliminating the state death tax. Indiana made more-modest cuts to its income tax rates, but supplemented that progress with the passage of a right-to-work law, sending a clear message that “Indiana is open for business.”
At the other end of the spectrum, Minnesota passed a $2 billion package of tax hikes in 2013, most of which came from raising its income tax rate on earnings over $150,000 ($250,000 for married couples) by two percentage points. Some provisions of the tax hike were subsequently repealed in 2014, but the result was still a net increase in taxes.
Perhaps the most significant of the report’s findings is the growing number of purple, and even blue, states that are embracing pro-growth policies, which the authors claim “reflects the understanding that catching up with their fast-growing free market and pro growth counterparts is a necessity.”
Wisconsin, for instance, passed two major tax cuts in 2013 and 2014, which together are expected to save taxpayers well in excess $1 billion over the next two years. Even with those cuts, the state is projected to enjoy budget surpluses in coming years. (RELATED: Wisconsin’s Tax Climate is Improving, But Still Lags Behind Most Neighbors)
Michigan also enacted “a number of bold reforms in recent years to make the state more hospitable to large and small businesses alike.” In addition to passing right-to-work legislation, the state initiated “a phase-out of the personal property tax,” allowing it to move up eight spots in the rankings, from 20th to 12th. (RELATED: After Right-to-Work, 80% of Michigan Healthcare Workers Desert Union)
Even some deep-blue states took steps to reduce taxes. In Maryland, “one of only two states that still maintains both an estate tax…and an inheritance tax,” the legislature passed a bill to gradually make the estate tax less punitive and give wealthy residents “less of a reason to flee the state.”
In addition, at the time of the report’s publication, the Rhode Island House had passed a budget cutting the corporate income tax rate from 9 percent to 7 percent and raising estate tax exemptions.
Looking ahead the authors say that, “there are a number of states that are reasonably expected to take action to reform their tax codes for economic growth.” They identify Nebraska, Oklahoma, Missouri, Arizona, Tennessee, Michigan, and Georgia as states that are well positioned to enact major tax cuts and pro-growth reforms in the coming year. Conversely, only Nevada, Maryland, and Illinois are expected to seriously consider tax increases next year.
Laffer, Moore, and Williams attribute the trend toward pro-growth policies to competition among the states, claiming that, “the past 50 years of data point to a clear connection between pro-growth policies of lower taxes, less regulations, and competitive labor policies with the creation of healthier state economies.” (RELATED: States Lower Taxes to Remain Competitive)
In addition to having generally stronger economies, low tax states are also much better at providing public services, Laffer told reporters on a Tuesday conference call. “It’s not just economic growth;” he said, “it’s also good governance.”
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