Lawmakers right to cut tax rates

There is much to criticize in the way in which GOP lawmakers and Gov. Doug Ducey enacted their income tax reform. It was buried in a multifaceted budget reconciliation bill along with entirely unrelated provisions, such as an increase in unemployment benefits, in blatant violation of the state Constitution’s one-subject rule.

That acknowledged, reducing the state’s top marginal individual income tax rate from Proposition 208’s 8% back down to the previous 4.5% was important. Simply put, as a general rule, high marginal income tax rates are negatively associated with economic growth.

There are exceptions. There are some high-tax states that exceed the national average on such things as growth in employment and personal income. And there are some low-tax states that lag behind.

But the general rule is the general rule.

The period from 2010 to 2019, from the recovery from the housing bubble to prior to the COVID-19 economic slowdown, offers a useful illustration — a stretch of as normal of economic conditions as are to be found.

During that period, only two of the 10 states with the highest individual marginal income tax rates exceeded the national average in either employment or personal income growth.

California and Oregon were the exception. The rest of the high-tax states, into whose ranks Proposition 208 would have propelled us, were the rule.

Now, there are those who make the improbable argument that after-tax returns on investment and labor make utterly no difference in relative economic performance among the states. They tend to make two arguments, one an ideological spasm and one a statistical magic trick.

The ideological spasm is: Kansas. Exactly why the left decided that just reciting the name “Kansas” was sufficient refutation of the relationship between after-tax returns on investment and labor and relative state economic growth is unclear. Kansas, with a top marginal income tax rate of 5.7%, is not a low-tax state. That’s a higher rate than Arizona pre-208 and higher than any of our Rocky Mountain neighbors.

You can’t cite Kansas without coming to grips with Texas and Florida, economic powerhouses with no personal income tax at all. Again, the general rule versus the exceptions.

The magical trick is to look not at absolute growth in an economic measurement such as personal income, but instead consider it on a per-capita basis.

There are three ways in which an economy grows. Friction in economic transactions, such as regulation, can be reduced. Worker productivity can increase. Or more workers can be attracted.

Of the three, adding workers through population growth has the most immediate and biggest effect on expanding a local economy.

However, the per-capita calculation makes the relative difference between states in attracting workers, the largest factor in relative economic growth, magically disappear. It doesn’t matter if a state is repelling or attracting workers. That’s just a base adjustment.

This greatly matters in this discussion because there is an irrefutable migration in the United States from hightax states to low-tax states.

That’s not just rich people trying to avoid a big tax bill. It’s average Jacks and Jills moving to states with greater economic opportunity because of a superior entrepreneurial environment, fueled by a higher after-tax return on investment and labor.

The argument is also made that investments in education are more important than after-tax returns.

Now, the quality of education is incredibly important. K-12 education is the biggest service state government provides, by a large margin. Its quality is our kids’ future.

But, in terms of growing an economy, investments in education aren’t a substitute for a favorable entrepreneurial environment, anchored by after-tax returns on investment and labor.

Of the 10 states that spend the most per-pupil on K-12 education, not a single one exceeded the national average in personal income growth. Only one exceeded it in employment growth.

Even education quality isn’t a surefire way to grow an economy. For example, of the 10 states with the highest eighth grade reading scores on the National Assessment of Educational Progress, only four exceeded the national average in employment growth and only three in personal income growth.

The problem with education as an economic growth strategy is that the end product is an educated person, who owns the education and is mobile. The more educated the person, the more likely he or she is to relocate across state lines one or more times.

Now, it’s fair criticism that opponents of Proposition 208 should have done a better job of making this case when it was before voters. I was astonished at how superficial the opposition campaign was in making the economic argument.

But, at a maximum rate of 4.5%, Arizona was one of the states consistently beating the national average in personal income and employment growth. Taking action, weaving through the interstices of the voter protection law, to avoid putting that at risk was the right thing for the governor and legislators to do.