On September 20, 2022, Show-Me Institute and Show-Me Opportunity hosted a discussion with Arthur B. Laffer, Jeanne Sinquefield and Brian Domitrovic about their upcoming book Taxes Have Consequences: An Income Tax History of the United States.

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Economists Arthur Laffer, Stephen Moore, and Erwin Antoni predict that this tax increase will mean the migration of 700,000 fewer people, 237,000 fewer jobs created, and a $25.5 billion reduction in personal income growth in Arizona over the next 10 years. These predictions are staggering, and while they are predictions, any negative effects even close to these would be detrimental to Arizona’s economy.

Despite the evidence of the negative effects of income taxes, especially relative to other forms of taxation, old habits die hard. State and local revenues are expected to take a hit from the pandemic and economic shutdown, so income tax increases may be on the minds of many lawmakers. In Missouri, we’re already seeing localities toying with the idea of tax increases (though not necessarily income tax increases). Income tax increases have very real economic consequences and our state cannot afford them. In this case, Missouri shouldn’t follow in Arizona’s footsteps.

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You can watch the full discussion here: https://www.youtube.com/watch?v=4BorO19ELMc

You can listen to the podcast here: https://bit.ly/2L5qkql

The post Virtual Town Hall with Art Laffer appeared first on Show-Me Institute.

In our new report Rich States, Poor States, prepared for the American Legislative Exchange Council, we compare the economic performance of states with no income tax to that of states with high rates. It’s like comparing Hong Kong with Greece or King Kong with fleas.

Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs.

There are many excellent analyses and anecdotes in Rich States, Poor States. From state-specific stats to broader policy discussions, RSPS serves as a fine starting point for assessing our states’ economic health.

But some RSPS history needs to be noted regarding the book’s specific discussion of Missouri’s “economic outlook” (RSPS‘s forward-looking metric). Laffer and Moore’s observations about states without income taxes bears repeating — they have grown significantly in contrast to other income tax-reliant states — but from the perspective of policymakers and legislators here, the view RSPS paints of the Show-Me State is starting to diverge from the book’s own backward-looking “economic performance” metric.

How has Missouri done according to RSPS‘s metrics over the book’s last five editions? Well, the state has risen to seventh from 25th of the 50 states in “economic outlook” over the last five years, even as its actual performance has languished by RSPS‘s standards around 40th (roughly consistent with BEA and BLS statistics).

As the chart shows, the disparity between “where Missouri is going” and “where Missouri has been” has never been greater. I think that is a problem with RSPS‘s “outlook” metric, not the policy Laffer and Moore advocated in the Wall Street Journal. More to the point, the state has continued to flail in growth, arguably in part because the state continues to cling to its income tax and tax credit system, rather than shifting to a more effective, and less destructive, taxing system that does not pick winners and losers and does not penalize income.

Unfortunately, that hugely important point could get clouded when people see Missouri’s “outlook” ranking, which only considers the impact of income taxes as fractional, evenly-weighted components among more than a dozen factors of varying real-life importance. Missourians across the ideological spectrum do not agree on much, but what they certainly do agree on is that Missouri’s economic status quo is unacceptable and is not improving. In substance, Laffer and Moore agree with that assessment, despite what RSPS‘s “outlook” metric suggests.

The pathway to state growth that Laffer and Moore articulate is a clear one; Missouri is lacking only the political will and leadership to take it over the finish line. The outlook for finding that sort of political leadership, unfortunately, is decidedly more mixed, and while it remains mixed, Missouri’s economic performance will continue to suffer.

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Jonathan Williams' PowerPoint

Joseph Haslag's PowerPoint

The Missouri Compromise — An essay on comparative tax rates and economic performance among states by Dr. Arthur Laffer

The post Failing State Experiments: Taxing Their Way Into Poverty appeared first on Show-Me Institute.

• Garry Kasparov speaks at the John Cook School of Business, co-sponsored by the Show-Me Institute.
• Chairman Crosby Kemper examines the free-market movement in light of recent developments.
• A look at the recent state-wide victory to potentially eliminate earnings taxes in Kansas City and Saint Louis.
• An article covering our recent open house in our Central West End office with keynote speaker Art Laffer.
• Rebecca Bruchhauser details some New Year’s Resolutions for legislators who wish to grow the Missouri economy.
• An overview of the recent flurry of Show-Me Institute publications.
• Details on ways in which the Show-Me Institute’s message is being heard throughout Missouri.

The post Show-Me Newsletter: 2011, Number 1 appeared first on Show-Me Institute.

Laffer was the keynote speaker at the Show-Me Institute’s Open House, held Oct. 21, 2010.

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Year end is a time to reflect — and to think ahead. In the holiday spirit, the Show-Me Institute has compiled a list of five New Year’s resolutions for state officials, to promote better government for 2011 and beyond. Taken together, these policy changes have the potential to propel Missouri’s income and job growth into the front ranks.

First, lose weight. The Nov. 2 election showed that the overwhelming majority of Missourians (and Americans generally) want smaller, less intrusive government and reduced taxes. Missouri legislators should therefore unite to kill pork barrel spending projects and make major spending cuts.

Municipalities need to rein in runaway pension costs for city employees, including firefighters and police. They should also consider privatizing the provision of water, electrical power, and other services. The Show-Me Institute has produced a wealth of research demonstrating the benefits of privatization, which creates much-needed cash through the sale of public-owned assets and contributes to municipal revenues through the addition of new taxpaying entities in the private sector. Research shows that privately owned utilities consistently provide more efficient services than their public-sector counterparts.

Second, stop meddling in other people’s business. The Show-Me Institute has spotlighted the proliferation of needless licensing requirements that do nothing to promote public safety in businesses as different as home heating and air conditioning work (HVAC) and African hair-braiding. Such requirements are often promoted by established businesses as a means of inhibiting competition and choice.

Third, give families real school choice. Our research has consistently shown that education is improved when parents and students are given more choices and traditional public schools face greater competition from charter and virtual schools. Adjusted for inflation, we spend four times as much for education in urban areas today as in 1960, but educational achievement is no higher. Today, the Saint Louis and Kansas City school districts spend more than $15,000 per pupil — more than all but the most expensive private schools. Charter schools provide a real opportunity for poor students stuck in failing schools. They also enable teachers and administrators to innovate more freely, and force other public schools to improve their performance in order to compete successfully.

Fourth, halt the silly business of awarding specialized tax credits to favored enterprises. In one of my op-eds about the inanity of tax credits for favored industries, I pointed out that government policy should not prefer filmmaking over, say, hog farming, “simply because one is considered to be more glamorous.” Most of the local jobs created by Missouri film productions like Up In the Air were both low-wage and temporary — many lasting only a single day. Missouri should do away with its development tax credit programs, which have a record of failing to boost either income or employment — even if you do like George Clooney.

Last but not least, repeal the state income tax and replace it with a broader sales tax. The adoption of such a plan in 2011 would be the single most important step that Missouri could take to move Missouri to the front of the pack in terms of growth. The noted economist Arthur Laffer, who spoke at the Show-Me Institute in October, observed that during the past decade, the nine states without a personal income tax have “outperformed those states with the highest personal income tax rates by 26.5 percent, and have outperformed the U.S. average by 20 percent.” Even more impressive, those nine states “outperformed Missouri by a whopping 41.5 percent.” Eliminating the income tax would encourage people to work and save more, crucial factors for economic growth. A broader sales tax can also be balanced with mechanisms that would compensate those with lower incomes for any potentially regressive effects.

In the past, it has often seemed that major changes originate on the coasts and slowly make their way to the heartland. I think that flow has been reversed during the past year and a half. I believe that Missouri — and the heartland — will play a leading role in our nation’s economic recovery. We will do so through a renewed commitment to free enterprise.

Christine Harbin is a policy analyst for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

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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.

The post Implementing Pro-Growth Tax Policy Requires Rigorous Analysis appeared first on Show-Me Institute.

In the past decade, the nine states with the highest personal income tax rates have seen gross state product increase by 59.8%, personal income grow by 51%, and population increase by 6.1%. The nine states with no personal income tax have seen gross state product increase by 86.3%, personal income grow by 64.1%, and population increase by 15.5%.
[…]
Over the past 50 years, 11 states have introduced state income taxes exactly as Messrs. Gates and their allies are proposing—and the consequences have been devastating.

The 11 states where income taxes were adopted over the past 50 years are: Connecticut (1991), New Jersey (1976), Ohio (1971), Rhode Island (1971), Pennsylvania (1971), Maine (1969), Illinois (1969), Nebraska (1967), Michigan (1967), Indiana (1963) and West Virginia (1961).

Each and every state that introduced an income tax saw its share of total U.S. output decline. Some of the states, like Michigan, Pennsylvania and Ohio, have become fiscal basket cases. As the nearby chart shows, even West Virginia, which was poor to begin with, got relatively poorer after adopting a state income tax.

These findings support the conclusions of a number of Show-Me Institute publications. In March, we published a policy study showing that taxes have a negative impact on economic activity. I used that data to write an op-ed. Show-Me Institute Chief Economist Joe Haslag and intern Abhi Sivasailam wrote last fall about the relative benefits of a sales tax versus an income tax. Finally, policy analysts Dave and Jenifer Roland compared the economic growth of Missouri to Tennessee, and found Missouri falling behind Tennessee, possibly because of Tennessee’s lack of an income tax.

The post More Evidence Against State Income Taxes appeared first on Show-Me Institute.

As unlikely as it may seem, this middle-aged, middle-income, Midwestern state is pushing the envelope on its way toward fundamental tax reform. […]

[A]lthough Missouri’s revenue replacement could prove difficult politically, the benefits from reform could be enormous if the process is administered well and the constitutional amendment is carefully crafted.

In their discussion, the authors cite Prof. Joseph Haslag and Abhi Sivasailam’s recent Show-Me Institute policy study, “Previous Estimates Overstate ‘Fair Tax’ Rates, Harms,” in the appendix.

Laffer, et al., also include a comparison of Missouri and Tennessee, and they provide evidence that Missouri would experience additional growth if it eliminated its personal income tax. From chapter 2:

During the past 10 years, if Missouri had just caught up with the average of the states with no income tax, the average Missouri resident’s income would be more than $12,000 higher. That is amazing. Taxes really do matter. […]

The evidence is clear: States without an income tax outperform in every conceivable fashion than their higher-taxed brethren and have more tax revenues.

Given the data at hand, it is hard to imagine any more conclusive results from a cross-section time series of states that could be obtained in favor of Missouri’s tax proposal. Like many states in our current economic climate, Missouri needs help, and from the looks of it, a switch from onerous income taxes to broad-based sales taxes is exactly what the doctor ordered.

This echoes what Jenifer Roland and Dave Roland concluded in their 2009 policy study for the Show-Me Institute, “All Caught Up: How Tax Policy May Have Allowed Tennessee to Outgrow Missouri.”

The state snapshot for Missouri contains some good news and bad news. In 2008, Missouri’s personal income per capita cumulative growth is higher than the national average, but the state experienced negative net migration for the first time in a decade. This indicates that, when voting with their feet, people are choosing to locate outside of Missouri. On the 2010 ALEC-Laffer State Competitiveness Index, where 1 is the best and 50 is the worst, Missouri has an economic performance rank of 35 and an economic outlook rank of 15.

The post Missouri and the Show-Me Institute Featured in Rich States Poor States appeared first on Show-Me Institute.

Finally, one attribute for which Missouri is probably most famous is its Gateway Arch in St. Louis. Admittedly, we have a special fondness for this architectural wonder: It’s the world’s largest Laffer Curve!

I hadn’t noticed it before, but it’s true!

Illustration by Christine Harbin. Photo source: Wikipedia.

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But all isn’t well. Missouri’s economic development and growth rates are chronically below average. During the past 10 years, employment has grown 8.8 percent nationally, while Missouri has boosted jobs by only 6 percent. In their study, Laffer, Moore, and Williams provide one explanation for the state’s lagging performance: Missouri’s personal income tax rates.

The post Why a Sales Tax Is Better for Missouri than an Income Tax appeared first on Show-Me Institute.

Legislators have suggested provisions to further expand Medicaid. From an article on Kaiser Health News:

Currently, many low-income adults are not eligible for Medicaid, but they could be if Congress decides to “make income alone the determinant of Medicaid coverage. Under the health reform bill now being considered by the House, all non-elderly people earning at or below 133% of poverty — about $14,400 for an individual, and $29,300 for a family of four — would be eligible.” The House bill would have the federal government “pick up the entire cost of those newly covered under Medicaid — $438 billion over 10 years,” while a Senate finance draft version “would have the feds paying the additional cost for only five years, after which the states would have to pick up their typical share of existing Medicaid costs, which averages over 40%” (Tumulty, 7/21).

As Show-Me Institute intern Abhi Sivasailam said in an earlier blog entry, economist Arthur Laffer recently published an op-ed in the Wall Street Journal about the proposed federal health care reform. The main cause of out-of-control spending in the existing health care system has been the “health-care wedge,” the distance that a patient/consumer has from the actual cost of a procedure. Medicaid exacerbates this wedge by completely separating the patient from any responsibility. The payment structure of Medicaid (which compensates for a lesser amount than some procedures cost) encourages doctors to order more tests than necessary in order to recoup costs. This cycle only raises taxpayer expenses and the cost of health care in general.

Regarding Medicaid, Missouri has relatively low expenditures compared to the rest of the country. Missouri spent $6.6 billion on Medicaid in 2007, approximately 2.06 percent of what the United States spent that year. During the past 10 years, Medicaid spending in Missouri has grown at a slower rate than the national average, but it is still growing. Every dollar that Missouri spends sees some percentage of a match (based on a varying multiplier rate) from the federal government. In 2008, the federal government paid for 62.4 percent of Medicaid’s cost; in 2009, that percentage has jumped to 71.2. This creates an even larger wedge for states that have less of a responsibility for each enrolled individual, but are making payment decisions. Some other states have already (or almost) run out of money to pay for Medicaid, including New Hampshire, Georgia, Illinois, and Mississipi. With compensation decreasing to a point lower than procedural cost, more doctors are refusing to accept new Medicaid and Medicare patients. It is apparent that Medicaid is not working, and Medicare is set to run out of money by 2017. Expanding Medicaid and creating a similar public option are not workable solutions.

One way to decrease the size of the “health-care wedge” is by encouraging the use of health savings accounts (HSAs), something that the Show-Me Institute has written about, and that Arthur Laffer writes about in his op-ed:

A patient-centered health-care reform begins with individual ownership of insurance policies and leverages Health Savings Accounts, a low-premium, high-deductible alternative to traditional insurance that includes a tax-advantaged savings account. It allows people to purchase insurance policies across state lines and reduces the number of mandated benefits insurers are required to cover. It reallocates the majority of Medicaid spending into a simple voucher for low-income individuals to purchase their own insurance.

Health care vouchers and HSAs may be the best ways to fix the growing health care problem, and to rein in Medicaid before it becomes even more unsustainable than it already is.

The post Reining in Medicaid appeared first on Show-Me Institute.

Laffer agrees with reformists that the cost inflation of health care is unsustainable. He contends, however, that the plans currently on the table neglect the true source of these costs — the “health-care wedge” between the actual costs of providing care and the costs incurred by a patient. Laffer writes:

When the government spends money on health care, the patient does not. The patient is then separated from the transaction in the sense that costs are no longer his concern. And when the patient doesn’t care about costs, only those who want higher costs—like doctors and drug companies—care.

Laffer’s research suggests that $1 trillion in government health care subsidies will thus do nothing to control costs, and will even serve to accelerate cost inflation. He proposes reform based on modifying the structure of incentives by encouraging personal responsibility:

A patient-centered health-care reform begins with individual ownership of insurance policies and leverages Health Savings Accounts, a low-premium, high-deductible alternative to traditional insurance that includes a tax-advantaged savings account. It allows people to purchase insurance policies across state lines and reduces the number of mandated benefits insurers are required to cover. It reallocates the majority of Medicaid spending into a simple voucher for low-income individuals to purchase their own insurance. And it reduces the cost of medical procedures by reforming tort liability laws.

As I see it, the national health care debate is centered on three core values: cost, access, and quality. By focusing purely on expanding access to health care, we fail to honor our commitments to restraining cost and maintaining quality. It may be better, then, to look for proven tools that focus on cost reduction as a means to expanding access. This means not only considering the aforementioned proposals, but also pursuing continued deregulation of primary care, encouraging the health services sector to move away from fee-per-service incentive structures, and lowering the education and opportunity costs incurred by health care professionals.

Stay tuned for Laffer’s Missouri-specific health care report for the Show-Me Institute.

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