The year 2013 may go down in history as pivotal in the battle between the states to attract businesses and high-income earners because of local tax advantages. Five news stories highlight the shift that is occurring across the nation as taxpayers and legislators recognize that tax policy matters in the lives of every American.
This week that battle played out in real-time, with media around the country reporting All-Star second baseman Robinson Cano’s decision to leave the New York Yankees for the Seattle Mariners. According to this report by Bloomberg, Cano will earn a staggering $42 million more if he decides to make the great state of Washington his home. Not only will Cano benefit from living in a state with no income tax, but he will now benefit from playing in a division that includes two teams based in the no-state income state of Texas: the Texas Rangers and the Houston Astros.
In August, during this interview with CNBC’s Maria Bartiromo, U.S. golfer Phil Mickelson reiterated his concern about the high income taxes levied on earnings of corporations and individuals. Mickelson’s statement – that California’s high tax rates are not “making me want to go out and work harder” – clearly supports the trade-off that exists between income tax policy and government revenues. As the stories of Mickelson and Cano reveal, a lower tax rate encourages work, output, and employment, plus it provides an incentive to increase these activities.
Art Laffer and Stephen Moore laid out the proof that tax policies matter years ago in their groundbreaking book, Rich States Poor States, now published annually and in its sixth edition. Since that time, states around the country have debated which tax policies provide the best incentive for economic growth and job creation, and workers have considered tax rates when deciding where to live.
In addition to Cano’s big win in his deal with the Mariners, this year ends on a fiscal high-note for 18 states that made significant changes to their tax structures that will lay the foundation for future growth. Here’s a quick look at three states presently enacting pro-growth tax policies that will attract workers and employers: North Carolina, Ohio and Wisconsin.
North Carolina will place $500 million back into the pockets of its workers and employers in the next two years. They will do this thanks to legislation passed that has flattened out the state’s income tax rates, reduced tax rates across all income levels, lowered the corporate income tax rate, eliminated the death tax, broadened the sales tax base, and that has completely wiped out several other taxes.
Ohio cut a whopping $2.7 billion in taxes between now and 2016, including a 10% cut in personal income tax for all earners, a deduction for LLCs on their first $250,000 of annual taxable income, and an increase and broadening of sales taxes. All in all, Ohio’s legislature is moving $650 million back into real economic activity.Wisconsin simplified its tax code by eliminating 17 special-interest tax deductions, plus it reduced the number of tax brackets from four to three. In addition, all earners will see a reduction in tax rates.
State-level momentum for pro-growth tax policy is building across the country, with one-quarter of the states enacting meaningful tax laws that allow workers and employers to keep more of their earnings. If this trend continues and states like Nebraska and Missouri, where elected officials are pushing for enlightened tax policies of their own, there will be little doubt that it’s all happening in the states.
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