Do State Highways Actually Improve With Higher Income Taxes?

Many people talk about the road less traveled. For 11 states between 1961 and 1991, however, that “road” involved instituting a state income tax after having none at all. For Maine, Rhode Island, New Jersey, Connecticut, Pennsylvania, West Virginia, Ohio, Indiana, Illinois, Michigan, and Nebraska, this road is more than proverbial, it is physical. State highways are considered a huge benefactor of the fruits of an income tax system, though for these 11 states, interesting conclusions can be drawn on how state highways may not be benefiting as economists originally estimated.

State Highway Rankings Are a Two-Way Road

“The Wealth of States” gives a great case study about what happened to these 11 states’ public services and infrastructure when they adopted a state income tax. In short, state leaders thought that such a tax would help improve their states’ services with minimal economic damage. But the results proved drastically different. The book reveals that each state’s share of the U.S. population and total gross domestic product (GDP) declined after adopting a state income tax (p. 4).

How does the negative impact of this tax affect state highways? Data from Reason Foundation, compiled by “Wealth of States” (p. 22), reveals that five of the 11 states that adopted an income tax after 1960 improved their highway performance ranking between 1984 and 2009. However, six states’ rankings sharply declined:

• Rhode Island: Ranking fell from 46 to 49
• Nebraska: Ranking fell from 2 to 6
• West Virginia: Ranking fell from 26 to 32
• Indiana: Ranking fell from 13 to 22
• Pennsylvania: Ranking fell from 28 to 39
• Maine: Ranking fell from 12 to 29

Residents Taking Revenue When They Leave

Although nearly half of the 11 states did see an improvement in their state highway rankings during this time frame, this improvement was likely not a result of state income tax. State income tax can actually contribute to lower tax revenues overall due to residents moving away to areas that don’t charge income tax. These states may also experience other issues as a result, such as an increase in the ratio of state poverty to national poverty between 1959 and 2012 in nine of the 11 states mentioned above (p. 21).

Economist Arthur B. Laffer advises lawmakers that if they want to see an immediate positive impact on a state’s economy, they should cut the state income tax. For state highways in particular, if the benefits of state income taxes were clearer cut, a higher percentage of states that adopted an income tax would see a boost in their highways’ overall ranking within the United States.

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