Despite what conventional wisdom might tell you, the correlation between tax rates and tax revenue is less well-defined than you might believe, according to Duquesne University economics professor Antony Davies.
Dr. Davies was one of three featured speakers at Wednesday's "Policies and Principles Luncheon", hosted by the Commonwealth Foundation, a Harrisburg think tank. He was joined by Dr. William Ruger, a political science professor at Texas State University-San Marcos; and Jason Sorens, a political science professor at SUNY-Buffalo. The subject of the hour-long discussion was "Freedom in the 50 States", with an emphasis on how economic and personal freedom in Pennsylvania has a positive or negative impact on the state's finances.
Pennsylvania Independent Podcast:  Increasing Tax Revenues - Featuring Dr. Antony Davies, professor of economics at Duquesne University |
After studying tax policy and revenue in Pennsylvania over the past thirty years, Dr. Davies has found economic conditions and tax policy have little impact on revenue per capita that the state rakes in. What does matter is the Gross State Product - the state equivalent of Gross Domestic Product - because overall productivity is most closely correlated to tax revenue.
"State and local tax revenues in Pennsylvania going all the way back to 1977 have averaged 9.6 percent, plus or minus half a percent, of the state GSP. This is despite large fluctuations in unemployment over that period, despite changes in the marginal income tax rates in Pennsylvania, and despite real economic growth," said Dr. Davies. "What this suggests is that tax policy aimed at raising revenue is going to fail. It is going to fail because the state has little or no control over its share of GSP. "
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Regardless of tax policy, increased spending that outpaces the growth of production in the economy will result in a budget crisis like the one facing the state today, according to Dr. Davies' research.
"You get 9.6 percent of GSP, whether you raise taxes, lower taxes, or turn cartwheels," said Dr. Davies. "So if you're looking to raise revenue, don't look to raise revenue, look to grow the economy. Tax policy that grows the economy will give you 9.6 percent of a larger pie."
In addition to Dr. Davies comments on tax revenues in the state, Dr. Ruger and Dr. Sorens discussed the link between state-to-state migration and relative freedom.
"There is a strong correlation between freedom and migration. Freer states attract people, and less free states repel them," said Dr. Sorens. While Pennsylvania has seen less out-migration than many of its neighbors, the Commonwealth experienced a net loss of 0.4 percent from 2000-2007.
Migration into a state means a dynamic economy that attracts competition from other places, while out-migration means stagnation, such as in New York, which experienced a 7.6 percent rate of negative migration from 2000-2007, said Dr. Sorens.
Despite having been ranked 20th in the nation in their initial study, released in February 2009, Pennsylvania's overall freedom ranking has slipped to 25th in the preliminary report the two researchers have compiled for their updated rankings, as of yet unreleased.
"It's been more of a matter of standing still while other states are taking advantage of recent changes in the economy to make tough decisions about spending and to reform their regulatory environment," said Dr. Ruger, explaining Pennsylvania's downward slip.
Pennsylvania's ranking should come as little surprise to many, give the state's reputation for being "right in the middle" of the political spectrum, said Dr. Sorens, but that does not mean Pennsylvania should stop trying to improve.
Overall, the researchers found that "red states" tend to be freer than "blue states", but the difference is more noticeable in areas of economic freedom than in areas of personal freedom.
The freest states are actually the so-called "pink states" - with conservative values influencing fiscal and economic policy but more liberal approaches to social issues - such as Colorado, Idaho, and South Dakota. Other low-tax states - Texas and New Hampshire - rounded out the top five.
Eric Boehm is a reporter for the Pennsylvania Independent. He can be reached at Eric@PAIndependent.com
