Across the Nation

An Income Tax Case Study: The Decline of 11 States

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The theory for adopting a state income tax goes something like this: The additional money collected by the state will support such public services as schools, hospitals, and police protection; fund roads and other state infrastructure; and provide services for the disadvantaged.

This theory doesn’t always play out as expected, however. According to data compiled by The Wealth of States, higher tax rates aren’t guaranteed to improve public services. But they can lead to poverty, creating a greater need for welfare spending.

A Closer Look at 11 States

Eleven states implemented a tax on income after 1960, and each of those 11 states is in a worse condition today than in the five years before implementing their new tax. Those states are Connecticut, Illinois, Indiana, Maine, Michigan, Nebraska, New Jersey, Ohio, Pennsylvania, Rhode Island, and West Virginia.

Each of those 11 states has seen a decline in population and output levels in relation to the 39 other states. Even more shocking is that none of the 11 states has increased its share of state tax revenues after adopting taxes on income.

The whole reason for implementing an income tax is to increase tax revenues. How is it possible for the opposite happen?

Wrong Assumptions

When the 11 states implemented income tax, the assumption was that nothing else would change. The government would end up with more money, and the private sector would end up with less. End of story.

But there is more to this taxing tale. Many residents and businesses in the 11 states have reacted to their additional taxes by moving to states with lower tax burdens, severely damaging the abandoned states. When a state experiences a decrease in population and output, called a gross state product (GSP), it has less money to invest in services that make the state attractive to newcomers.

The Fall of the Giants

Four states, all of which were industrial giants at one time, have been hit particularly hard: Pennsylvania, Ohio, Michigan, and Illinois. Pennsylvania’s population decreased by 38 percent between 1959 and 2012, Ohio by 37 percent, Michigan by 35 percent, and a 34 percent decrease in Illinois.

What About Public Services?

The addition of a state income tax has not helped improve education, health and hospital services, crime, poverty, or roads in the 11 states. Here are some of the findings on the effect income taxes has had across multiple public sectors.

  • 4th-grade education: Three of 10 states (there was no data for Illinois) slightly increased their reading and math score rankings between 1959 and 2012, but the rest saw a decrease.
  • 8th-grade math: Five states improved their ranking, but six states saw a decline.
  • Health and hospital services: Four of the 11 states increased their number of health and hospital workers, while seven saw a decrease.
  • Crime: Three of the 11 states reduced violent crime, but violent crime increased in the remaining eight states. Four of the 11 states reduced property crime, one showed no change, and the remaining six saw an increase in property crime.
  • Poverty: Three states showed a reduction in poverty, while eight showed an increase. Half of the eight experienced large increases in poverty.
  • Roads: Five states improved their highways, while six states saw a decline.

The bottom line is that in the 11 states that introduced a tax on income, all lost tax revenues, and all states’ GSP shrank compared with the other 39 states. On top of that, tax burdens rose for the people who stayed.

These 11 states make up a modern case study of the effect income taxes have on the well being of a state. As legislation pushes forward in some states to decrease or remove income taxes entirely, new data will make itself evident and hopefully solidify each state’s foundation, public services, and reverse the outward migration.