Do state tax cuts create economic growth? Research offers mixed evidence, but policymakers often face very strong pressures from the business community to create and maintain generous tax breaks. This project investigates how state taxes affect economic growth by analyzing relationships among marginal tax rates, employment, earnings, and investments.

The Relationship between Taxes and Growth at the State Level: New Evidence

The effects of state tax policy on economic growth, entrepreneurship, and employment remain controversial. Using a framework from prior research that generated significant, negative, and robust effects of taxes on growth, we find that neither tax revenues nor top-income tax rates bear stable relations to economic growth or employment across states and over time. Our results are inconsistent with the view that cuts in top state-income tax rates will automatically or necessarily generate growth.

The Growth Mirage: State Tax Cuts Do Not Automatically Lead to Economic Growth

Building on a widely cited study that identifies a robust negative relationship between tax rates and state growth, we find that the negative effects disappear when extending the sample into the 21st century. Likewise, examining recent state tax cuts reveals little evidence of tax cuts driving growth.

Other State and Local Finance Initiative projects

Economic Development Strategies  |  State Spending and Revenues  |  Modeling State Taxes and Federal Interactions