Source: Calculations based on data from the Bureau of Economic Analysis and Bureau of Statistical Analysis
Voices are telling Michigan residents once again that the state
needs higher taxes to provide for increased spending on things like "cool
cities" and higher education. To make their case, the high-tax proponents often
cite cross-state comparisons that use static "snapshot" statistics and spurious
associations. For example, one pro-tax organization has pointed to higher
personal income in states with higher per capita tax burdens than Michigan’s and
concluded, "High taxes don’t matter."
The 10 states with the lowest tax burdens are growing at an average rate of 2.6 percent — almost double Michigan’s growth rate and 34 percent faster than the national average.
Comparing states is always dicey because it’s hard to
distinguish which variables are really important. It’s especially problematic
when based on overly simplistic snapshot analyses. Looking at trends over time
is much more revealing.
For example, of the 10 states with the fastest growing real per
capita personal income from 2001 to 2005, only three had per capita tax burdens
higher than the national average. What’s more, two of those three exceptions
were Wyoming and Hawaii, which are typically excluded from state-by-state
analyses because of unusual characteristics that make for unique economic
situations. The third exception was Maryland, which has grown largely as the
result of increased national defense spending following Sept. 11, 2001.
Nevertheless, proponents of higher taxes and higher spending
argue that Michigan really doesn’t want to be like faster-growing, lower-tax
states like Alabama, Tennessee, Montana or Iowa, because they all have lower per
capita personal incomes. Herein lies the inadequacy of snapshot analysis. The
main reason these states have lower incomes today is because they did so in the
past — they have long been relatively poorer states. But fast growth means they
won’t be poorer in the future.
If these recent growth rates continue, the average income in
Alabama and Tennessee will be more than the Michigan average in just three
years. Montana passes us in six years and Iowa probably will this year. Unless
Michigan adopts policies that are more conducive to growth, which state looks
like a better place to raise a family?
Similar trends are visible when one looks at real per capita
state gross domestic product growth rates. Of the 10 fastest growing states,
only one has a per capita tax burden higher than the national average. Looking
at the flip side of these numbers, the 10 states with the lowest tax burdens are growing at an average rate of 2.6 percent — almost double Michigan’s growth rate and 34 percent faster than the national average. Which states look like better bets for investors?
The proponents of increased state spending on higher education
also find little comfort in recent income growth figures. Between 2001 and 2005, the 10 states with the highest proportion of adult college graduates grew at an
average rate of 1.93 percent — better than Michigan, but slightly below than
national average. In the 10 states with the fastest growing personal income,
eight had fewer grads than the national average, and only Hawaii and Maryland
had more. These figures suggest that having lots of graduates is not a key
determinant of economic vitality.
To be fair, statistical comparisons such as these don’t always
tell the whole story. The phenomenon called "regression toward the mean"
explains at least part of the differences — states at the low end of the
economic growth range tend to catch up, and those at the high end can’t move
much higher. The same applies to percentages of college graduates. But such
"convergence" only explains part of the differences.
Also, no serious economist would argue that taxes are the only
factor that explains different economic growth rates. But they are an important
Finally, those who say that the solution to Michigan’s economic
malaise is to spend more on universities haven’t explained how this state gains
by granting diplomas to the next generation of Tennessee, Iowa or Alabama
workers. Yet that is exactly what we will be doing if there aren’t jobs
available for graduates in Michigan. Unless Michigan makes significant
improvements in its tax, regulatory and labor law climates, the jobs won’t be
here and nothing will prevent our graduates from seeking opportunities in
fast-growing, low-tax locales.
Jack McHugh is a legislative analyst and James M. Hohman is a
research assistant for the Mackinac Center for Public Policy, a research and
educational institute headquartered in Midland, Mich.
Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.