Exploring the Relationship between the size of Government and Economic Growth

Ganon Evans  |  September 19, 2022

"U.S. Supreme Court Justice Louis Brandeis saw states as “laboratories of democracy” conducting “experiments” in public policy. Today, more than eight decades after Brandeis coined the phrase, state experimentation with tax policy makes it abundantly clear that tax policy has a direct impact on economic growth. As shown on page 27, each of the eleven states that enacted an income tax since 1960 now has a smaller share of state GDP relative to the other 39 states and each one also has a smaller share of state and local tax revenue. That is a remarkable statistic; those eleven states enacted a new source of tax revenue and lost revenue share to other states! On the contrary, states with low tax burdens and states without an income tax consistently outshine their higher-burden peers on the key, tangible economic measures like growth in private-sector jobs, GDP, and wages. What’s more, citizens are taking notice and “voting with their feet” by flock- ing to low-burden states from higher-burden counterparts. Skeptics try to dismiss this definitive migratory trend by cherry-picking success stories like Texas and Florida and characterizing them as ‘’happy accidents” of favorable geography, climate, and/or resource abundance.

The true secret to having a low tax burden is not geography, climate, or availability of natural resources but a simple matter of mathematics: states that spend less are able to tax less. A state could, for example, have all of the oil in the nation but still have a high tax burden if it spent more. Every state offers the same basket of services (e.g., education, social services, and highways), but some states provide those services at a better price and pass the savings on to citizens in the form of lower taxes. As shown on page 19, states that tax income spent 52% more per-resident in 2020 than those without an income tax. Moreover, having low state taxes doesn’t prompt high local taxes. The table on page 17 shows that income-taxing states have 12% higher per-capita local tax collections than states without an income tax.

State and local governments should be encouraged by these findings show- ing that they are not hostage to situations beyond their control (climate, resources, etc.) but are instead in charge of their own destinies. Sustained economic prosperity and job growth are available to those that adopt a “Better Service, Better Price” culture, where government constantly strives to provide the same or better quality of service at a better price and keeps tax burdens low.

While states like Iowa, Mississippi, Arizona, and Indiana have all embraced significant income tax reform over the past year, Kansas continues to fall behind in economic competitiveness by not embracing significant reform. Similarly, high property taxes still serve as a large burden on communities. The Property Tax section shows that Kansas has some of the highest effec- tive tax rates in the nation. Between 1997 and 2020, 67 of Kansas’ 105 counties saw county property tax collections more than double despite a decline in population. City and township property taxes only added to the burden. The size of local government is likely the greatest factor in Kansas’ local property tax problem. On a residents per unit of general-purpose gov- ernment (cities, counties, and townships) basis, Kansas ranks #48 among the fifty states and has more than five times the national average number of local government entities, with 1,472 residents per unit of general-purpose government versus a national average of 8,559 residents per unit of GPG. In many Kansas counties, government jobs account for more than a third and sometimes more than half of total jobs. The economic benefits of reducing state taxes will be diminished until substantive action is taken to reduce the local government footprint in Kansas.

Finally, the Economic Peer Group section returns to this year’s Green Book. Our January 2017 study “A Thousand Flowers Blooming: Understanding Job Growth and the Kansas Tax Reforms” gave rise to its addition. The study points—among other things—to the importance of comparing job growth in Kansas to that of states most similar to Kansas in terms of economic and industry makeup. Too often, comparisons stop at just Kansas’ neighboring states without bothering to consider whether those states have anything else in common with Kansas apart from geography. As such, this Green Book continues to offer comparisons across the nation as well as Kansas’ geo- graphic region but also compares Kansas to the seven-state peer group explored in “A Thousand Flowers Blooming” on a host of economic metrics. The peer group states were matched with each other based on the degrees to which their private-sector workforces were employed in the same major industry sectors according to the U.S. Bureau of Economic Analysis.

Methodology Statement: All data and ranking sets presented are the most up-to-date available from each respective source at the time of printing. For most per capita calculations, population estimates were chosen from the year in which the data to be divided by the population estimate was published. States with low tax burdens and those without an income tax have superior gains jobs, Gross Domestic Product (GDP), wage and salary disbursement, and domestic migration (US residents moving to a given state from another)."

Read the full article on: 2022 Kansas Green Book Report

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