Politics & Policy

America’S Tax-Cutting Governors

There's a reason why their states have the competitive edge.

Many U.S. governors insist that taxes cannot be cut because government programs and spending levels must be maintained. America’s tax-cutting governors, by contrast, are a select group of leaders that have moved to lower tax rates on income and capital investment in states from New Mexico to South Carolina to Montana. This latter group has found that one of the best ways for state governments to maintain spending is by cutting tax rates to levels that will attract business — and thus more tax revenue.

Are tax rates in your state higher than other states in your region? You can find out from the Federation of Tax Administrators, which provides a list of tax rates for 2005 by each state. Only seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) have no income tax, and two others (New Hampshire and Tennessee) limit their income to dividends and interest only. In addition, no state capital-gains tax is imposed on entrepreneurs in these states.

Other states impose the highest rates in their regions and are headed by governors who are not working to reduce high tax rates on income and capital investment. These include North Carolina and Arkansas (South), California and Oregon (West), Vermont (New England), New Jersey (Mid-Atlantic), and Iowa (Midwest). Tax rates are one factor among many that entrepreneurs taken into consideration when they look to set up businesses — and if tax rates in these states were reduced, it follows that these states would become more competitive.

New Mexico’s Democratic Gov. Bill Richardson made this argument in his first (2003) address to the state legislature: “We will bring New Mexico’s top personal income tax rate down to five percent in four years. After all, Texas and Nevada have no personal income tax at all. Arizona and Colorado already top out in the five percent range.”

The Democratic-controlled legislature heard Richardson’s call and reduced New Mexico’s top income-tax rate from 8.2 to 4.9 percent over five years. They also agreed to cut the state capital-gains tax.

Richardson said, “I am convinced that by making New Mexico a more tax-friendly place for growth-oriented businesses and entrepreneurs, the cut in rate[s] will be more than compensated for by the increase in taxpayers — and income — in that bracket.” He was right. Summer 2005 revenue estimates for New Mexico show the state will receive an additional $216 million this fiscal year, including higher personal income-tax revenues.

South Carolina’s Republican Gov. Mark Sanford advanced a similar fiscal agenda after his 2002 election. Sanford proposed cutting his state’s top rate from 7.0 to 4.45 percent over ten years. He argued, “Lowering the income tax will give South Carolina a competitive advantage when it comes to attracting jobs and encouraging business start-ups.”

“Unfortunately, Sanford lost the battle,” noted a 2005 report by the Cato Institute. “Democrats in the state legislature successfully filibustered his income tax bill, and both houses overrode most of Sanford’s 106 budget vetoes. It’s inspiring to see someone fight as hard for such deeply held principles as Mark Sanford does.”

The Cato report noted other governors who have “proposed or enacted” a reduction in the top income-tax rate during their tenures. These include Republicans Bill Owens (Colorado), Dirk Kempthorne (Idaho), Mitt Romney (Massachusetts), Judy Martz (Montana), and George Pataki (New York), and Democrat John Baldacci (Maine).

Gov. Martz’s successful drive to make Montana’s economy more competitive is singularly impressive. She left office after four years of aggressive tax cutting. Under her leadership, Montana’s top rate of 11 percent was slashed to 6.9 percent. Cato’s authors concluded, “Martz is a rare example of a governor who left office with the state in better shape than she found it.”

The supply-side formula is succinct: Tax something less, get more of it. Want more tax-paying businesses in your backyard? Tax those businesses less.

–Greg Kaza is executive director of the Arkansas Policy Foundation, an economic research organization based in Little Rock.

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