The philosophical underpinnings of this shift comes from the laughable Arthur Laffer, he of right-wing "trickle-down" and "supply-side" theory, what George H.W. Bush once referred to as "voodoo economics." He claims states with lower income tax burdens economically outperform those with higher taxes. Laffer has worked with the notorious American Legislative Exchange Council to make the case for states to shift the tax burden to those least able to pay.
The Institute on Taxation and Economic Policy has a new report out—States with “High Rate” Income Taxes are Still Outperforming No-Tax States—which, if the authors were less polite would call the ALEC-Laffer claims bullshit. In short, the report concludes, economic conditions in states with income taxes—even with the highest top tax rates—are "at least as good, if not better" than in states without a personal income tax.
• In reality, states that levy personal income taxes, including the states with the highest top rates, have seen more economic growth per capita and less decline in their median income level over the last ten years than the nine states that do not tax income.There are currently nine states without income taxes. Four of them are doing worse than the average state in economic growth per capita: Texas, Tennessee, Florida and Nevada. Five of them are doing worse than average in median income growth: New Hampshire, Florida, Tennessee, Alaska and Nevada. Six of them have had higher than average annual unemployment rates over the last decade: Texas, Florida, Tennessee, Washington, Alaska and Nevada.
Unemployment rates have been nearly identical across states with and without income taxes.
• Laffer’s claims to the contrary rely on cherry-picking a number of blunt, aggregate measures of economic growth that are closely related to population trends, and incorrectly asserting that tax policy is a leading force behind the migration trends that fuel this
growth. Laffer omits measures like median income growth and state unemployment rates in his comparisons of states with and without income taxes, yet selectively cites these measures in other studies when the story they tell fits his preferred narrative.
• More fundamentally, Laffer’s simplistic analysis fails to account for the fact that states without income taxes often choose not to levy such a tax precisely because they possess unusual economic advantages that allow them to raise revenue (and grow their
economies) in ways that other states cannot. In-state analysts and Laffer himself have correctly observed that factors like natural resources, federal military spending, and even favorable climate contribute to state economic growth. Many of these factors are of
great significance in states without income taxes, but while Laffer mentions them in the text of his reports, he makes no effort to control for them in his quantitative analyses.
Chalk up another pile of crap for the supply-side theorists.