While many studies have documented the detrimental effects on economic growth of state and local taxes and of the personal income tax, a 1982 study by Richard Vedder was one of the first to directly compare the effects of the personal income tax with those of the sales tax. Vedder ranked the states by real growth in per capita personal income from 1970 to 1980. The 16 states with the fastest income growth were the "high-growth" states, while the 16 with the slowest income growth were the "low-growth" states. Vedder found that the 1980 per capita state and local tax burden in the low-growth states was more than 25 percent higher than in the high-growth states.
Looking at the income and sales taxes separately, however, provided a very different picture. The per capita state and local income tax burden in the low-growth states was 125 percent higher than in the high-growth states. In contrast, the sales tax burden in the low-growth states was actually a bit lower than in the high-growth states. This supports what economic theory tells us about the relative effects on economic growth of the income tax and the sales tax. Vedder surmises, "it would appear that from the standpoint of maximizing the rate of economic growth, the optimal state and local fiscal policy would be one in which the overall tax burden is comparatively low, coupling high sales taxes with low income and property taxes."
A 1992 Cato Institute study included a similar exercise, examining the nation's 80 largest cities. It found that of the 13 cities that experienced the fastest real per capita income growth, only one imposed an income tax, while over one-third of the low-growth cities had an income tax. While the low-growth cities depended more heavily on the income tax, the high-growth cities were more dependent on the sales tax. The average per capita sales tax burden in the high-growth cities of $155 was more than double the $72 per capita sales tax burden in the low-growth cities. This further supports the assertion that high income tax burdens tend to inhibit economic growth while high sales tax burdens, relatively speaking, do not.
A 1993 study by Stephen Moore provided further support for the theory that income tax increases do inordinate harm to economic growth. Moore summed the enacted revenue increases in each state in fiscal years 1990 through 1993 as a percentage of 1990 personal income, and examined economic growth figures over that time. He found that the top ten tax-increasing states experienced a net gain of only 3,000 jobs, an increase in the unemployment rate of 2.2 percentage points, and a $484 real decline in personal income per family of four.
The performance of the top ten income tax-increasing states was even worse--a loss of 182,000 jobs, a 2.3 percentage point increase in unemployment, and a $613 real decline in personal income per family. In contrast, unpublished research for the Cato Institute shows that the performance of the top ten sales tax-increasing states over that same period was markedly better--a net gain of 408,000 jobs, only a modest 0.4 percentage point rise in unemployment, and a $1,568 real increase in personal income per family.