Tennessee's relatively low tax rate helped the state outperform the country in its economic growth over the past decade, according to a new conservative study that ranks Tennessee as one of the top states for its economic outlook.
But in the annual ranking of states by the conservative American Legislative Exchange Council, Tennessee slipped from seventh place a year ago to eighth place in the new comparison of the 50 states.
From 2008 to 2018, Tennessee's overall economy as measured by its gross domestic product grew by 44.7% — the 11th fastest of any U.S. state and above the national average in all but three of the 10 years. The Volunteer State also added a net 251,287 persons from domestic migration — the 8th highest of any state — and grew payroll employment by 13% to rank No. 12 for job growth among the states.
A new study by the conservative American Legislative Exchange Council credits Tennessee's relatively low tax rates and right-to-work labor policy for much of those gains. Tennessee is one of nine states that don't have a personal income tax and Tennessee is phasing out its tax on inherited income and other unearned income at the end of this year.
Best states for economic competitiveness
5. North Carolina
Source: American Legislative (ALEC) and Dr. Arthur Laffer. "Rich States, Poor States," 2020.
Despite having the ninth highest sales tax burden of any state and an average tax on corporate income, Tennessee still boasts the fifth lowest average property tax rate of any state and overall one of the lowest tax burdens among the 50 states.
"In a state like Tennessee where we have probably the lowest tax burden of any state in the nation, this is a state that people move to from other higher-tax states," said Arthur Laffer, the leading "supply-side" economist who backed President Ronald Reagan's tax cuts in the 1980s and helped co-author the new report on "Rich States, Poor States." "Economic growth is the answer to lots and lots of our problems and when you look at tax structures don't look at static burdens, look at dynamic burdens."
Laffer is among those drawn to Tennessee, relocating from California to Nashville in 2006.
Without a personal income tax or a state tax on inherited wealth, Tennessee derives the biggest share of its tax revenues from sales taxes, which disproportionately is paid by low-income families who spend a bigger share of their income on taxable sales than do higher-income families. Proponents of an income tax argue that it is more progressive and will grow as the economy does better.
But Stephen Moore, an economist who previously headed the Club for Growth and worked at the Heritage Foundation, said income inequality is actually greater in states like New York, Illinois and California than in lower tax states.
"I would argue that the states that are the most regressive are those with high income taxes because those taxes destroy jobs and economic opportunity," Moore said.
For the 13th consecutive year since ALEC launched its annual ranking of the economic competitiveness of the states, Utah continues to rank No. 1. Utah has no income tax and fewer regulations and taxes that limit growth, according to the study. Utah is also one of the leading states for economic growth and new residents moving into the state.
Jonathan Williams, chief economist of the American Legislative Exchange Council, said the study looks at domestic migration trends among the states "because one of the ultimate measures of whether a state is successful or not are how people vote with their feet toward a state or away from a state."
Williams said the tax reform package approved by Congress in 2017 that eliminated the deductibility for state and local taxes "has put more pressure on high-tax states and has further driven migration away from states like Illinois, New York and New Jersey and I expect that trend to accelerate.
"All taxes matter for growth, but not all taxes are created equal," Williams said. "Income taxes, dollar for dollar, are the very worst kind of taxes a state can raise for economic growth purposes. It has horrible effects on the growth in states in the metrics we measure."
Such taxes are also more volatile during economic downturns like the current recession caused by the coronavirus pandemic.
While Tennessee enjoyed better business and economic growth in a relatively low tax state, Tennessee's median household income in 2018 of $52,375 was still 15.4% below the U.S. median, according to the U.S. Bureau of Census.
Contact Dave Flessner at email@example.com or at 423-757-6340.