In politics today, myths are often more powerful than facts. But in the real world, facts still hold sway.
Myth: Economies in states without an income tax perform better than in other states
Fact: There is no linkage between the performance of a state’s economy and its use of an income tax. Since 2000, the per-capita personal income growth rankings of states that lack a personal income tax are third, fourth, 11th, 25th, 31st, 32nd, 35th, 41st and 50th. In short, while some of these states have performed very well others have performed very poorly. And two-thirds of these states rank between 25th-50th among the 50 states.
Myth: The Texas economy, a state without an income tax, is outperforming Oklahoma’s economy.
Fact: Using the most widely recognized measures of state performance, Oklahoma’s economy compares favorably to Texas. For example, Oklahoma’s economy on a per-capita basis has grown, since 2000 at the 15th fastest pace in the nation. Texas is 32nd. Oklahoma’s per-capita personal income has grown since 2000 at the seventh fastest pace in the nation. Texas ranks 25th. Oklahoma’s median household income since 2000 has grown at the fourth fastest pace in the nation. Texas ranks 22nd on this metric.
Myth: A recent report produced by the Oklahoma Council of Public Affairs proves that eliminating the personal income tax will benefit the state economy.
Fact: The report, authored by Arduin, Laffer & Moore, a Florida-based consulting firm, cavalierly uses sloppy statistics to inflate the estimated benefit from eliminating the personal income tax. Specifically, the report’s econometric analysis suffers from what economists and statisticians refer to as an “endogeneity problem” — a problem that results in biased estimates (a number of state economists have raised this concern in recent weeks). In actuality, the econometric evidence with regard to the economic impact of state income tax cuts is unclear. In fact, there is convincing evidence that tax cuts financed through cuts to education and highway spending actually decrease economic growth.
Myth: Government spending detracts from economic growth.
Fact: Actually, some government spending is necessary to foster economic growth. When government spends money on education, it is providing the next generation of workers with the human capital it needs to prosper. When government spends money on highways, it provides the means by which firms can get their products to market. When governments spend money on prisons, it keeps criminals off the streets thus letting commerce flourish. In fact, it is hard to imagine any successful economy populated by uneducated, unhealthy people who must travel on dirt roads populated by criminals. In short, government spending matters too.
Myth: Low taxes are the most important way to stimulate economic growth.
Fact: Much more important to taxes is quality of life. In order for an economy to grow it needs to create a place where people want to live and work. It must be a place that offers the amenities that make life enjoyable. It must be a place where people are proud to call home. Our own experiences tell us that this is rarely about taxes. After all, when we brag about Oklahoma to our out-of-state friends and family, what do we say? I don’t know about you, but it’s not the tax system I rave about — it’s the people, the cities and the atmosphere. Let’s not forget that enhancing our quality of life is what our focus should be.
MICKEY HEPNER is the dean of the College of Business Administration at the University of Central Oklahoma. Hepner serves on the Executive Committee of the Board of Directors for The Oklahoma Academy.