David J. Shakow (Pennsylvania; Of Counsel, Chamberlain Hrdlicka, Philadelphia) has posted Does It Hurt a State to Introduce an Income Tax?, 58 State Tax Notes 679 (Dec. 6, 2010), on SSRN. Here is the abstract:
In an article in the Wall Street Journal [The Bill Gates Income Tax, Oct. 5, 2010], Arthur Laffer argued that, since 1960, the introduction of state income taxes reduced the relative size of a state’s gross state product and its relative per capita personal income. This paper criticizes Laffer’s conclusions on a number of grounds.
- He uses incorrect figures for per capita income. In fact, relative per capita income rose in a majority of states that introduced an income tax since 1960.
- The results are not clear when a state’s data is compared to other states in its region, rather than to the United States as a whole. Since many of the states that introduced an income tax were hard-hit by the decline in the economy (such as Illinois, Indiana, Michigan, Ohio, West Virginia), the comparison to the United States as a whole is misleading.
- Even if the data were accurate, the argument for causation would be quite weak because so many other factors affect a state’s economic health.
