When former Reagan administration economist Arthur Laffer decided to leave the taxes and regulations of California and move to Nashville in 2006, he claims his tax savings alone nearly paid for his move.
Laffer, the father of so-called "supply side economics," which advocates for tax cuts to stimulate growth, insists his new home proves his philosophy, especially since Tennessee moved last year to drop its inheritance tax and phase out any state levy on investment income by 2022.
› 1. Utah
› 2. Indiana
› 3. North Carolina
› 4. North Dakota
› 5. Tennessee
Source: American Legislative Exchange Council (ALEC) study of 15 economic factors that affect growth by economists Arthur Laffer, Stephen Moore and Jonathan Williams. Georgia ranked 17th and Alabama was 21st. The worst states, in order, were New York, Vermont, New Jersey, California and Connecticut.
"Tennessee is now the lowest tax state in the nation and we still have a $2 billion budget surplus with some of the fastest economic growth in the nation and the most improved schools in the nation," Laffer said Tuesday. "So if you want a good model for growth, look to Tennessee."
Laffer and other conservative economists who compile the annual ranking of the states for the conservative American Legislative Exchange Council (ALEC) said Tennessee's move last year to phase out its state tax on estates and investment income helped push the Volunteer State into the top 5 states for its economic outlook. The 11th annual study by ALEC, billed as "Rich States, Poor States," concludes that states with lower taxes on income like Tennessee are making bigger economic gains compared with states that tax personal income at higher rates.
"The nine no-income tax states (including Tennessee) have had almost three times the job rate increase that the states with income taxes have had," said Stephen Moore, another conservative economist and co-author of the annual study of the states. "There is a clear migration of businesses, factories and jobs to these states that have no income tax, and I'm just mystified that more states have not moved into that column."
The Economic Performance Ranking examines 15 economic measures, most of which reflect ALEC's conservative policy recommendations such as lower government spending, right-to-work laws to limit unions and lower or no minimum wage rates.
Defenders of the estate tax and state income taxes insist such taxes are more equitable, since richer persons pay a bigger share of the tax, and are less regressive than sales taxes which poor people pay a bigger share of their income than do wealthy individuals.
"States without an income tax like Tennessee have more regressive tax systems, meaning that taxes tend to disproportionately fall on low-income taxpayers through higher sales tax rates," said Carl Davis, research director at the liberal-leaning Institution on Taxation and Economic Policy. "In the long run having a well educated and trained workforce and an efficient and safe infrastructure is critical for economic growth and states with higher taxes are often more able to afford such services."
ALEC's analysis rates states with fewer public employees better on their scale, even though Davis said that may mean they have lower teacher-to-pupil ratios in the classroom or fewer colleges and universities to train future workers.
State and local tax polices also can't overcome other economic forces, such as when oil prices dropped and Alaska's economy suffered even though it has no state income tax.
But Laffer and Moore insist the data overall shows that low-tax states usually outperform other states with higher tax burdens.
"Generally speaking, states that spend less — especially on income transfer programs, and states that tax less — particularly on productive activities such as working or investing —experience higher growth rates than states that tax and spend more," Laffer and Moore wrote in their 85-page report released Tuesday.
Tennessee ranked only about middle of the pack, or 21st among the 50 states, in the growth of the state's gross domestic product and nonfarm payroll growth from 2005 to 2015. But Tennessee was among the top 10 states for domestic in-migration, which helped to push up the state's jobless rate above the U.S. average since job growth has not always kept pace with the increase in the number of job seekers.
Tennessee's economy grew by 38.8 percent in the decade ended 2015, which exceeded the U.S. rate, especially in the past couple of years. In that same period, 261,544 persons moved to Tennessee from other states, placing the Volunteer State as the 9th fastest growing state for in-migration during that period.
ALEC rated Tennessee one of the best states for not having a personal income or estate tax and for being a right-to-work state with the lowest minimum wage rate. Tennessee's was rated the worst for its sales tax burden (the 40th highest among all states).
Contact Dave Flessner at email@example.com or at 423-757-6340.