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A Year Later States Lead the Way on Tax Reform

Article by Matthew Denhart April 17, 2013 //   4 minute read

In the middle of tax week 2012, the Bush Institute’s 4% Growth Project hosted a national conference to highlight how changes in tax policy could ignite strong economic growth. The conference, “Tax Policies for 4% Growth,” took place in New York City and featured the efforts by five governors to enact pro-growth tax reform in their respective states. There was a sense among conference participants that the states, rather than Washington, D.C., would lead the way on tax reform in 2012. Now a year removed from the conference, it is evident that this has indeed been the case.

Presenting at the conference, the five governors — Paul LePage (ME), Sam Brownback (KS), Chris Christie (NJ), Mary Fallin (OK), and Bill Haslam (TN) — made clear that strong economic growth depends on maintaining a competitive tax system. If a state’s tax code becomes overly burdensome, they explained, people and businesses move away and the state’s growth suffers.

Taking their own advice to heart, over the past year these governors have made serious efforts to keep their states competitive, and their economies strong. Last year Governor LePage took the first step in eliminating Maine’s income tax by reducing the top rate to 7.95% from 8.5%. Meanwhile, Governor Brownback successfully cut Kansas’s top individual income tax rate to 4.9% from 6.45%, and eliminated the state’s income tax on most small businesses. For these efforts LePage and Brownback earned “A” grades from the Cato Institute’s recent “Fiscal Policy Report Card on America’s Governors.” The other governors deserve praise as well. Governor Christie repeatedly vetoed tax hikes passed by the New Jersey legislature, and has pushed for a significant reduction in the state’s income tax. Governor Fallin has already achieved one rate cut to Oklahoma’s individual income tax, and is working with the legislature again this year to achieve further reductions. Tennessee has no state income tax, but rather than become complacent, in 2012 Governor Haslam approved a bill that will eliminate the state’s inheritance tax.

Perhaps even more important than any single state’s tax reform, however, has been the wave of tax competition that has been unleashed. When one state reduces its tax rates, competitive pressure is placed on other states to follow suit. In recent months, states like Ohio, Louisiana, Nebraska, and North Dakota have all also pursued tax reform that seeks to encourage economic growth by lowering rates. It is still too early to tell whether all these tax reduction efforts will ultimately prevail and be signed into law. But what is clear is that Americans have recognized that strong economic growth relies on maintaining a competitive tax system.

Communicating the possibility of strong growth and the ways such growth can be achieved is at the heart of what we do at the 4% Growth Project. It is gratifying to see progress on pro-growth tax reform in so many states across the country. There is, however, still much work to be done. In 2013 we will build upon the successes achieved in 2012, and we hope readers will check back often to follow all of our most up-to-date tax research and commentary. We are confident that if we can get tax reform right, our country will move closer and closer to the target of 4% annual growth.

This post was written by Matthew Denhart, research assistant to the 4% Growth Project at the George W. Bush Institute. Previously he served as administrative director of the Center for College Affordability and Productivity.