Implementing Pro-Growth Tax Policy Requires Rigorous Analysis

When the legislature reconvenes in January, the contentious issue of whether Missouri should repeal the state income tax will surely arise. At stake is not lost tax revenue, because proposals for repealing the state income tax also entail increasing the state sales tax in order to keep state tax revenues at the same level. Rather, the issue at hand is whether Missouri would be more prosperous with a more broadly based sales tax instead of the combination of state sales and income taxes that we have today.

Show-Me Institute scholars have researched this issue extensively. Most recently, the institute’s chief economist, Joseph Haslag, who is also an economics professor at the University of Missouri–Columbia, cowrote an essay with Washington University economics doctoral student Grant Casteel. The essay, available online at showmeinstitute.org, shows that the Missouri economy would grow more quickly if the income tax were repealed and the state sales tax were increased instead.

Taxation is an added cost, so it tends to discourage any taxed activity. In labor markets, an income tax increases the cost of employees working and employers hiring. Because workers subjected to an income tax receive lower wages than they otherwise would, the income tax discourages some employees from working as many hours as they might otherwise. Additionally, an income tax increases the price of hiring a worker — an employer will have to pay more for the same quality worker under an income tax system than he would otherwise.

By contrast, a sales tax discourages consumption. So the question becomes, will an economy grow faster if the state, through its tax policy, tends to discourage employment or if it tends to discourage consumption?

In their essay, Haslag and Casteel test several economic models of the Missouri economy to show that, in the long-run, Missouri would be better off with a higher sales tax. The additional tax on consumption would encourage Missourians to save more than they do now, and the lack of a state income tax would provide fewer disincentives to work. Combined, those effects would result in a substantial economic growth windfall.

Previously, Haslag has estimated that if the income tax were repealed, Missouri would see $438.6 billion more in real GDP growth over a 25-year period. This would result in more jobs and a higher standard of living for all Missourians, a tangible benefit that should not be ignored.

The essay by Haslag and Casteel, along with the estimate of increased economic growth, together affirm the findings of prominent economist Arthur Laffer: States with income taxes have slower-growing economies than states without income taxes. Additionally, Laffer has found that the 11 states that adopted personal income taxes in the past 50 years have seen their economies deteriorate. In some cases, Laffer found, the results have been catastrophic.

At the Show-Me Institute, we strive to be as forthcoming as possible about our research methods. Those who may question Haslag and Casteel’s findings can examine their methodology in their essay. In fact, Haslag and Casteel go to great lengths to explain the economic models and assumptions on which their findings are built. We encourage others, especially those who argue that an income tax is somehow better for Missouri, to do the same.

Economic policy is too important for state officials to implement it without rigorous analysis. We cannot let passionate rhetoric substitute for sound research when the economic health of Missouri is at stake. When it comes time for the General Assembly to consider changing Missouri’s tax structure, we hope that legislators will pay close attention to the analytic evidence presented, and disregard strong statements made without any supporting quantitative research.

Legislators should take note of the proven deleterious effect of income taxes in other states and the substantial economic growth that could occur if the income tax were repealed. It is time to consider changing the state’s tax structure so that Missouri’s economy does not continue to fall behind.

Audrey Spalding is a policy analyst for the Show-Me Institute, a Missouri-based think tank.