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

Brief

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

Abstract

Cuts in top state income taxes are intended to raise economic growth, but could instead force punishing spending cuts, as revenues fall and states confront borrowing constraints. Previous work shows no clear impact of state taxes on growth. In new research, we build 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 we extend the sample beyond 2000 and that the relationship is unstable over time and across taxes. Likewise, examination of recent state tax cuts reveals little evidence of tax cuts driving growth.

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