Much has been written in the last week about the plan put forward by Louisiana governor Bobby Jindal to end the personal and corporate income tax in that state. Jindal proposes to raise the sales tax to make up for lost revenue. His goal is to increase the economic growth of Louisiana by attracting new business ventures drawn by the zero tax rate. Today, the governor of Nebraska announced a similar plan.
Most coverage in the main stream media has been highly negative. The articles say that Jindal just wants to place the burden of paying for state government on the backs of the poor and middle class who can ill afford any extra expenses. More than a few pundits say that there is no reason to believe that cutting the income tax will lure anyone else to Louisiana.
The truth, however, is far from what the press has been saying. Indeed, most in the press seem to want to ignore reality. Here is a great example of what I am saying:
Fifty years ago, Stamford Connecticut was an old and dying city. Its industrial base was mostly gone. At that point, the city decided to try to remake itself. Like much of the Northeast, Stamford went in for the urban renewal which was so popular in the 1960s. Stamford, however, had a major advantage; Connecticut did not have a personal income tax. Stamford, you see, is just about 30 miles from Manhattan, and in the 1960s Manhattan was the home to about one-third of the largest companies in the USA. New York state and New York city, however, had very high personal income tax rates. Earned income in New York was taxed at a rate about 14% higher than the same income in Connecticut. Since the federal income tax went up to a 70% marginal rate for those in the highest income levels, the extra 14% in state taxes was major. So what happened? Companies started leaving New York City and many moved to Connecticut and Stamford in particular. Before long, this small city of under 100,000 people was home to a great many of the Fortune 500. Corporate executives moved along with their companies to Connecticut and paid lower taxes. The entire area around Stamford boomed.
In 1991, this all changed. Connecticut passed a personal income tax. The rate has been increased repeatedly so that as of the moment, there is not much of a difference between Connecticut and the surrounding states. When the tax was imposed, the movement of companies into Connecticut reversed. As the tax rates got higher, the flow of jobs out of the state gained momentum. Indeed, Connecticut is one of only two states that actually lost jobs over the last decade.
Obviously, there are factors other than tax rates that will affect economic growth rates; no one, however, is saying that the elimination of state income taxes is a panacea. Nevertheless, history does show us that the elimination of state income taxes ought to be a powerful force for a stronger economy.
Most coverage in the main stream media has been highly negative. The articles say that Jindal just wants to place the burden of paying for state government on the backs of the poor and middle class who can ill afford any extra expenses. More than a few pundits say that there is no reason to believe that cutting the income tax will lure anyone else to Louisiana.
The truth, however, is far from what the press has been saying. Indeed, most in the press seem to want to ignore reality. Here is a great example of what I am saying:
Fifty years ago, Stamford Connecticut was an old and dying city. Its industrial base was mostly gone. At that point, the city decided to try to remake itself. Like much of the Northeast, Stamford went in for the urban renewal which was so popular in the 1960s. Stamford, however, had a major advantage; Connecticut did not have a personal income tax. Stamford, you see, is just about 30 miles from Manhattan, and in the 1960s Manhattan was the home to about one-third of the largest companies in the USA. New York state and New York city, however, had very high personal income tax rates. Earned income in New York was taxed at a rate about 14% higher than the same income in Connecticut. Since the federal income tax went up to a 70% marginal rate for those in the highest income levels, the extra 14% in state taxes was major. So what happened? Companies started leaving New York City and many moved to Connecticut and Stamford in particular. Before long, this small city of under 100,000 people was home to a great many of the Fortune 500. Corporate executives moved along with their companies to Connecticut and paid lower taxes. The entire area around Stamford boomed.
In 1991, this all changed. Connecticut passed a personal income tax. The rate has been increased repeatedly so that as of the moment, there is not much of a difference between Connecticut and the surrounding states. When the tax was imposed, the movement of companies into Connecticut reversed. As the tax rates got higher, the flow of jobs out of the state gained momentum. Indeed, Connecticut is one of only two states that actually lost jobs over the last decade.
Obviously, there are factors other than tax rates that will affect economic growth rates; no one, however, is saying that the elimination of state income taxes is a panacea. Nevertheless, history does show us that the elimination of state income taxes ought to be a powerful force for a stronger economy.
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