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

Research Report

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

December 1, 2015

Abstract

The effects of state tax policy on economic growth, entrepreneurship, and employment remain controversial. Using a framework that in prior research 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. While the rate of firm formation is negatively affected by top income tax rates, the effects are small in economic terms. Our results are inconsistent with the view that cuts in top state income tax rates will automatically or necessarily generate growth.

Research Area: 

Cross-Center Initiative

Cross-Center Initiative: 
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