Taxes, Inequality, and Business Climate

Original post date: September 19, 2014
Article by: Dan Davy

Today, states are left with a difficult choice between maintaining revenue growth and providing a competitive business climate. Taxes that promote the most competitive business climates tend to be less progressive and have lower growth rates.

Standard and Poor’s (S&P)  released a new report finding that states that are the most reliant on income taxes—typically more progressive in tax rates—experience higher average growth rates. But these states experience more volatility in their revenues, leaving lawmakers in the lurch as they scramble to cut programs or raise taxes to balance the budget.

S&P also found an inverse relationship between inequality and revenue growth rates.  The tradeoff has grown over the last several decades as income inequality has increased and states which have no, or a low income tax are left with a larger and larger share of untaxable income.  This is amplified by the fact that as income is concentrated in the wealthy, consumption as a share of income decreases and a smaller share of income is taxable through sales taxes.

State and local revenue growth nationwide has fallen to nearly 4% since 2009 from rates between 1950 and 1979 of around 10%.

Florida, in contrast to most states, has no personal income tax and is one of the most sales tax-dependent states. Florida has experienced annual revenue growth rates of a modest 1.9% since 2009— below the national average and in part because of significant tax cuts—after seeing 11.8% annual growth between 1950 and 1979.

Meanwhile, a recent report by Wallethub.com, an on-line financial analysis aggregator, found Florida’s taxes to be the 5th least “fair” in the country. The researchers based their results on a survey showing Americans believed a fair tax system should be progressive, ranging from 2.5% for households making $5,000 a year upwards to 7.3% for households making $50,000 and a 16.36% tax for the $2.5 million tax bracket. Since Florida does not have a state income tax, it starts at the lower end of their criteria.

On the other hand, Florida’s tax climate is considered the 5th most competitive in terms of promoting economic activity according to a study by the non-partisan Tax Foundation.

Americans have noticed and have voted with their feet, making Florida second only to Texas—also having no personal income tax—in terms of net domestic migration gains.  This infusion of human capital and new consumers has helped fuel the state’s economic recovery.

Florida’s tax structure also benefits the public sector. Despite low revenue growth, the S&P study found that Florida has had much less volatility in its revenue growth. As a result, Florida has not been forced to take measures as drastic as some states  to balance its budget. This is a very important feature of Florida’s tax system because it provides more consistency and predictability for the public sector, helping to ensure service levels are maintained.

Income inequality has been growing and Florida’s tax revenue growth has been modest. However, we should be very cautious to reform our tax structure to address these issues. Progressive tax reforms could sacrifice the strength of our business climate and the jobs and incomes it provides for the 99% who need them most.

About DeVoe Moore Center

The DeVoe L. Moore Center is conducts economic research and policy analysis focused on state and local policy issues and is located in the College of Social Sciences and Public Policy at Florida State University in Tallahassee. As an educational institution the DMC provides professional research experience to undergraduate and master’s students through an extensive program of internships and independent study, preparing them for a future in public policy, economic development, public sector accountability and entrepreneurship.
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