State and local taxes and economic performance : an empirical study of how much taxes matter to economies

Abstract

Per capita income levels and growth vary considerably among the contiguous 48 states of America. This can be attributed to several factors, such as tax policies, government services, economic structures, education, and/or demographic structures. Analysis offered in this study focuses on the influence of taxes, controlling for other factors, on the levels and growth of per capita income among the U.S. states. Evidence does not show that taxes are an important factor in either income levels or growth when other factors are controlled. Nevertheless, estimates on the disaggregate tax variables show taxes on personal incomes have some negative effect on income levels and growth, and the change in overall tax burdens is negatively related to growth. There is strong evidence for conditional convergence among state economies. Development in education and metropolitan areas is important for both income levels and growth. A state's higher energy cost is compensated by higher wages. In addition, the constitution of a state's population affects its economy: the larger the non-labor force, the lower the income level.