From Florida to Kansas, governors have embraced Laffer’s theory that if tax rates become too high, they lead to less, not more, tax revenue…Laffer’s work is being touted in tax-cut campaigns not only in Kansas, but also in Oklahoma and Missouri as a brief for drastically reducing the state income tax or eliminating it altogether. He has visited all three states recently in different capacities to discuss research he says shows that states without an income tax generally enjoy stronger economic growth…Laffer also served on Florida Governor Rick Scott’s tax advisory board. He worked with Ohio Governor John Kasich last year to abolish the estate tax, and is doing the same now in Tennessee.
Comparing the Bush era (when taxes were cut) to the Clinton era (when taxes were increased on the wealthy) in terms of economic growth should have put Laffer and his supply side theories to rest. However, he is clearly still going strong. But as the Institute on Taxation and Economic Policy pointed out, Laffer’s new “research” showing that states should cut their income tax rates to spur growth is little more than snake oil:
While the results are no doubt attention-grabbing, the underlying regression used to produce them is deeply flawed. For starters, the analysis uses a misleading measure of “tax rates” that includes federal rates, thereby distorting what is intended to be an analysis of state tax policy and economic performance…Furthermore, 2002 was by far the worst year for U.S. economic growth in the eight-year period in the analysis, and 2001 also saw low growth nationally. Following the deep post- 9/11 trough, personal income predictably grew at a relatively fast rate, just as cuts in federal tax rates were coincidentally going into effect. By creating a bogus measure (federal and state tax rates combined) and mapping it onto an exceptional moment in economic history, Laffer creates the illusion that cuts in state tax rates between 2001 and 2003 fueled economic growth later in the decade.
As ITEP’s Carl Davis wrote, “the bottom line is this: no-tax states aren’t booming, and lawmakers should not expect their states’ economies to improve if they join the no-tax or low-tax club.” Former Wichita State University economics professor William Terrell called Laffer’s work “empty,” adding that it’s “amazing” that states are taking his work to heart.