States across the U.S. — including Arizona — are facing major budgetary challenges: 32 are dealing with budget gaps, and many governors are calling for more revenue by raising income taxes, broadening sales taxes, and hiking fees on everything from state park entries to hospital stays.
States like Alabama, Nevada, Kansas, and Ohio, are all poised to raise taxes and fees this year. This would be a mistake. Higher taxes stifle economic growth, kill jobs, and, ultimately, fail to deliver the revenue needed to improve state finances.
And some taxes, like income taxes, are more toxic than others. Income taxes hamstring small business because owners pay personal income taxes rather than corporate taxes. In Arizona, small businesses make-up about 97 percent of all employers, so our income tax makes it harder for our primary employers to grow their businesses and create jobs.
In an ideal world, policymakers would have an eye focused on how their tax policies affect job creation. In most cases, though, they tend to tax people first and ask questions later. Time and again, that strategy hasn’t been a winning one for states.
Between 2010 and 2012, for example, four states and the District of Columbia raised income taxes to generate more revenue. The effect was predictable – people “voted with their feet” by leaving these high tax states for better opportunities.
According to the Chicago Tribune, Illinois’ high taxes have resulted in 850,000 people leaving the state over a 15-year period. That’s one Illinois resident leaving every 10 minutes! No wonder the Chicago Cubs fans at spring training games here in Mesa tell me they’ve permanently relocated from Chicago to the Valley!
Illinois is not alone: The 10 states with the highest income taxes, including California, New York, and Minnesota, collectively, lost more than 3.4 million residents between 2003 and 2012. Even Hawaii has lost residents, which shows that the state’s 11 percent personal income tax trumps Heaven on Earth.
The lessons for Arizona are pretty obvious – staying put with our tax code (much less hiking taxes and fees), while other states like North Carolina and Georgia keep improving, is not enough. Businesses will leave for greener pastures and take top talent and hard-working people with them.
The decisions states make in response to their budget crises have high stakes, which is why the Center for the Study of Economic Liberty at Arizona State University supported Stephen Slivinski’s study on the feasibility of eliminating the income tax here in Arizona.
According to Slivinski’s study, Arizona can eliminate the income tax in just six or seven years — while allowing current spending to rise 2.3 percent annually. In other words, all current funding for schools, prisons, and roads can be maintained while simplifying the tax code. His math is straightforward and realistic, even suggesting broadening the sales tax.
And, Slivinski’s discussion is more than an abstract idea: an experiment along the lines of what he’s describing is playing out in North Carolina with remarkable success. North Carolina has flattened and cut its income tax and, as a result, the state’s revenues have been surging! The tax cuts will continue for several more years, portending to an exciting future for the Tar Heel State.
What North Carolina policymakers don’t know yet, and what Slivinski’s study is not able to tell us about Arizona, is the full extent to which reducing and eliminating the income tax will lead to economic bonuses. What companies will relocate here for the sunshine, dry heat, and absence of income taxes? Nobody knows for sure, but eliminating the income tax sends a clear message that Arizona is open for business.
We are one of the 32 states facing budget challenges. Most states have responded with higher taxes and calls for more revenue. Such arguments fail to recognize the root causes of the messes: excessive spending, high taxes, and weak economic growth.
Doubling down on a bad idea by raising taxes or “just” staying put is completely upside down. The evidence from our recent past is all we need. Arizona would be wise to join states like North Carolina in taking a path less traveled by adopting a tax policy that helps, rather than hurts, our businesses and hardworking Arizonans. Resolving to eliminate income taxes is a good start.
— Scott Beaulier is executive director of the Center for the Study of Economic Liberty at Arizona State University.