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STATES WITH NO INCOME TAX GREW FASTER IN 1990S ECONOMIC EXPANSION

Little Rock--States with no income tax grew at higher percentage rates than the United States economy between 1991 and 2000, according to a Policy Foundation analysis of Gross State Product (GSP) data (1) compiled by the U.S. Bureau of Economic Analysis.

States with the highest income tax rates, including Arkansas, grew at rates less than the entire nation when studied as a group.

Total current dollar GSP of the nine states without an income tax grew 79.5 percent, a growth rate greater than the U.S. average (68.6 percent). The total current dollar GSP of states with high income tax rates, including Arkansas, increased 67.4 percent during the period. The Private Industries component of Current dollar GSP grew 83.6 percent in states without an income tax and 71 percent in high tax states. The U.S. average in the period was 72 percent.

Real GSP-adjusted to reflect price changes-grew 53.4 percent in states without an income tax and 41.1 percent in high tax states. The U.S. average was 41 percent.

The nine states without an income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

Fourteen states and the District of Columbia levy an income tax rate of seven percent or higher. These high tax states are Arkansas, California, Hawaii, Idaho, Iowa, Maine, Minnesota, Montana, New Mexico, North Carolina, Ohio, South Carolina and Utah (2).

Gross State Product As A Performance Measure

Politicians, in an election year, tend to claim the economy in their state is performing well. Gross State Product is one performance measure of this claim. Other performance measures of politicians claims are private sector job creation (source: U.S. Bureau of Labor Statistics) and income growth (source: BEA).

GSP is the value added in production by the labor and property located in a state. It is derived as the sum of the GSP originating in all industries in the state. (3) GSP can be matched to other states, a region, the national average or performance under other politicians for purposes of comparison.

Arkansas (1.7 percent growth rate) was among 10 states with the slowest growth or a decline in real GSP between 1999 and 2000. A shortcoming of this comparison is that it represents a short time period when identifying the long-term trend is more important. A state whose GSP is growing faster than the U.S. average in expansion can be said to be performing better than a state that registers growth at a rate lower than the nation.

During the 1980s expansion (4) Arkansas' economy grew less than the U.S. average. The 1990s period is the second consecutive period of expansion where Arkansas' grew at a rate less than the U.S.:

Arkansas Growth Rates (GSP)

Total Current Dollar GSP (1982-90) 65.45% or 53.74% (1983-90)

Total Current Dollar GSP (1991-00) 64.07%

Current Dollar GSP (Private) (1982-90) 67.64% or 55.6% (1983-90)

Current Dollar GSP (Private Industries) (1991-00) 65.81%

Real GSP (Chained 1996 Dollars) (1991-00) 39.26% (5)

U.S. Average

Total Current Dollar GSP (1982-90) 77.36% or 65.57% (1983-90)

Total Current Dollar GSP (1991-00) 68.63%

Current Dollar GSP (Private) (1982-90) 77.85% or 65.94% (1983-90)

Current Dollar GSP (Private Industries) (1991-00) 71.97%

Real GSP (Chained 1996 Dollars) (1991-00): 45.77%

FOOTNOTES

(1) GSP data is analyzed three separate ways in this research memo: Total Current Dollar GSP, Total Private Industry GSP and Real GSP--adjusted to reflect price changes (Chained 1996 dollars). Real GSP estimates are derived by applying national implicit price deflators by detailed industry to the current-dollar GSP estimates by detailed industry. To identify differences across states that reflect the relative differences in the mix of goods and services that the states produce, the same chain-type index formula used in the national accounts is used to calculate the estimates of total real GSP and real GSP by major industry. See "BEA's Chain Indexes, Time Series, and Measures of Long-Term Economic Growth," Survey of Current Business 77 (May 1997): 58-68; "Comprehensive Revision of Gross State Product by Industry, 1977-94," Survey 77 (June 1997): 28-29; and "Gross State Product by Industry, 1992-99," Survey 81 (August 2001): 69-90.

(2) Federation of Tax Administrators New Hampshire and Tennessee tax dividends and interest. States with a top income tax rate of seven percent or higher are defined as "high tax states" in this research memo.

(3) U.S. Bureau of Economic Analysis.

(4) The November 1982-July 1990 expansion as defined by the National Bureau of Economic Research. The NBER is the official arbiter of cyclical peaks and troughs. Arkansas grew less than the U.S. average using 1982 or 1983 as the base.

(5) Real GSP (Chained 1996 Dollars) data is only available to 1986.

APPENDIX

Real GSP (Millions of Chained 1996 Dollars): (U.S., 1991) $5,688,697 (2000) $8,292,294 (States Without An Income Tax, 1991) Alaska $19,699; Florida, $260,202; Nevada $33,393; New Hampshire $24,578; South Dakota $13,441; Tennessee $98,096; Texas $388,112; Washington $117,065; Wyoming $12,353. (2000) Alaska $19,402; Florida $387,058; Nevada $60,524; New Hampshire $42,903; South Dakota $19,896; Tennessee $148,411; Texas $612,668; Washington $177,462; Wyoming $15,134. (High Tax States, 1991) Arkansas $46,172; California $912,709; Hawaii $38,516; Idaho $20,510; Iowa $63,891; Maine $27,010; Minnesota $116,918; Montana $15,852; New Mexico $32,672; North Carolina $162,742; Ohio $263,160; Oregon $67,556; South Carolina $76,509; Utah $37,752. (2000) Arkansas $64,299; California $1,266,944; Hawaii $38,582; Idaho $37,053; Iowa $86,666; Maine $33,201; Minnesota $174,746; Montana $20,418; New Mexico $53,461; North Carolina $255,914; Ohio $351,764; Oregon $119,684; South Carolina $106,362; Utah $63,242.(District of Columbia, 1991) $49,943. (2000) $53,695 Current Dollar GSP, Total and Private Industries, data is posted at the BEA site: www.bea.gov