The hidden cost of the income tax
Decades of experience have shown us that high taxes dampen economic growth. State policymakers hoping to encourage job growth are right to worry about their state's tax load on the private sector.
What needs more attention than it gets now is what a state taxes. As it turns out, most states actually rely on the very tax that slows job growth the most: the income tax.
Most states, for instance, assess higher income tax rates on those with higher incomes. Not only does that penalize those who are most successful in the private sector, it inhibits job growth by making small businesses—which are typically the creators of the largest share of jobs in most states and pay their income taxes through the personal income tax code—pay higher taxes the more they grow.
States with graduated-rate income taxes, like Arizona, also tend to see government revenues grow faster than personal incomes and that means the government gets richer faster than the private sector. That's always bad for long-term economic growth.
The best way out of the trap is to eliminate the tax that is the most damaging to economic growth. Eliminating the income tax in Arizona could not only remedy these problems but also help launch the state into the ranks of the economic powerhouses like Texas. This policy change could still create more than 20,000 new jobs in the first year because it gets rid of the hidden economic costs associated with an income tax.
Every state has natural advantages and disadvantages that policymakers cannot control. But they can control tax policy. Getting rid of the income tax is the only policy bold enough to fundamentally boost long-term economic growth in Arizona.
Stephen Slivinski is senior economist at the Goldwater Institute.