In an article in the Wall Street Journal, Arthur Laffer argued that, since 1960, the introduction of state income taxes reduced the relative size of a state’s gross state product and its relative per capita personal income. This paper criticizes Laffer’s conclusions on a number of grounds. 1. He uses incorrect figures for per capita income. In fact, relative per capita income rose in a majority of states that introduced an income tax since 1960. 2. The results are not clear when a state’s data is compared to other states in its region, rather than to the United States as a whole. Since many of the states that introduced an income tax were hard-hit by the decline in the economy (such as Illinois, Indiana, Michigan, Ohio, West Virginia), the comparison to the United States as a whole is misleading. 3. Even if the data were accurate, the argument for causation would be quite weak because so many other factors affect a state’s economic health.
Income taxation, state income tax, Arthur Laffer, causation of relative decline in gross state product, causation, statistical correlation, state economies, state GDP
State Tax Notes
Shakow, David J., "Does It Hurt a State To Introduce an Income Tax?" (2010). Faculty Scholarship. 343.