RESEARCH REVIEW: State tax and budget cuts don’t boost economic activity and can cause harm

Supporters of tax cuts often claim they will directly boost economic activity. A large body of research refutes this argument. In a comprehensive review of four decades of scholarship on this topic, two university researchers conclude, “The vast majority of the academic studies that examined the relationship between state and local taxes and economic growth found little or no effect.” Furthermore, new data sets and modeling techniques have revealed shortcomings of, and sometimes reversed, the results of earlier studies that found a negative relationship between tax rates and economic growth.

University of Maine economist Todd Gabe reflects the mainstream academic consensus when he writes, “Taxes are one of many costs faced by businesses, and a whole host of other regional characteristics are more important in the pursuit of economic development.” Gabe shared this finding in his 2017 book, The Pursuit of Economic Development: Growing Good Jobs in U.S. Cities and States. In an exhaustive analysis of the factors that have contributed to state economic growth since 1990, he finds no statistically significant connection between taxes and good jobs (which he defines as well-paid jobs that last).

This brief reviews recent studies on the impact of state personal income tax rates on various measures of economic growth. In all, they find that low-tax states fail to outperform high-tax states and tax cuts fail to spur economic growth.

Furthermore, recent cuts to Maine’s personal income tax rate have not helped the state capture a greater share of US economic growth. This brief also summarizes several analyses that describe how reductions in state spending, whether necessitated because of tax cuts or recession-induced revenue losses, ripple through the economy in ways that detract from economic growth and equitable outcomes.

Click here to read the full research review.