Recent Study Questions “New Hampshire Advantage”

A couple of weeks ago, Arthur Laffer — an economist made famous for his work in the Reagan administration — co-wrote an opinion piece for the Wall Street Journal warning that the expiration of federal tax cuts in January puts the country on the verge of a “Taxmageddon.”

Laffer’s “supply side” or “trickle down” economic ideas are at the root of what business boosters here call the “New Hampshire Advantage” — the Granite State’s lack of an income tax is what Laffer considers ideal. Laffer has been pushing this idea in state capitals of late.

As the Pew Center On The States’ Stateline reported in March, Laffer has been “staging a comeback,” working with politicians and organizations in Kansas, Missouri and Oklahoma to abolish the personal income tax. While Laffer was trying to dissolve the income tax in the Midwest, New Hampshire legislators were working to make an income-tax ban part of the New Hampshire constitution — a measure on which voters will get the final say in November.

Meanwhile, a senior analyst at the Institute on Taxation and Economic Policy was looking at the same question Laffer had — the impact of a personal income tax on states. In a study that is getting a lot of attention this week, Carl Davis came to drastically different conclusions.

Davis measured growth in economic output per person; growth in median income levels; and the unemployment rate to compare the nine states with the highest personal income tax rates (Oregon, New York, Maryland, Vermont, Hawaii, California, New Jersey, Maine, Ohio) with the nine states without income taxes (New Hampshire, South Dakota, Wyoming, Alaska, Washington, Texas, Florida, Tennessee and Nevada.) He concluded that “no-tax states aren’t booming.”

In fact, Davis writes, “the growth of states lacking an income tax is no more than coincidental.” How could this be?

Carl Davis / ITEP

Comparison Of States' Gross State Product

Davis points to the measures Laffer used, including population growth, total
employment growth, and total growth in state economic output. By failing to control for confounding variables like unrelated population trends, natural resource availability, climate and housing costs, Davis claims, Laffer ended up with skewed data.  For example, Wyoming and Texas have some of the largest mining sectors in the nation, and are located in the southern and western parts of the country, where population growth is trending across state lines.

Just what Davis’ findings might mean about the New Hampshire Advantage is hardly clear. Even if Davis were right that the growth most states with no income tax are seeing is due to unrelated population shifts and natural resources, New Hampshire has neither a growing population, nor significant natural resources. It’s an anomaly.

So stay tuned — we’ll be diving into this topic more deeply as New Hampshire’s vote on enshrining its lack of an income tax in the state constitution nears.


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