Taxes and Growth: A Review of the Evidence

Key considerations in evaluating the role of tax policy in economic growth include:

• Taxes and economic activity are inversely related: Recent research provides new evidence of an inverse relationship between taxes and various measures of economic activity. Studies have examined a wide range of economic variables, such as per-capita income, new business activity, and migration patterns.
• Tax policies between jurisdictions are interrelated: States are not independent; rather, they influence and are influenced by the policies of neighboring states. A change in the tax policies of one state may lead to change in the policies of neighboring states, and vice versa.
• Taxes and spending go together: There is tension among researchers regarding the impact of taxation on economic growth. One branch of the literature presents evidence that increases in state and local taxes accompanied by increases in expenditures to fund general fund services, such as education and public safety, may attract some types of business activity. However, other competently executed studies present evidence that taxes and economic activity are negatively related. This report attempts to reconcile the two lines of research.
• The impact of taxes is relative: The expected effects of taxes depend on a given jurisdictions relative position among competitors. The report therefore includes important comparisons of state tax burdens. Missouri’s overall marginal tax rate is relatively low compared to that of other states in the country as a whole (ranked 41) and those in its region (second-lowest of nine states). Missouri’s average tax rate has been consistently lower than the U.S. average since 1970. However, since the 1980s, Missouri has become less dependent on sales taxation (35 percent of own source revenue in 1984, falling to 21 percent by 2006).