Tuesday, November 16, 2010

Should Congress Let Bush Tax Cuts Expire? The Lesson from the States

Unless the lame duck session of Congress votes to extend the 2001 and 2003 tax cuts, often referred to as the Bush tax cuts, all wage earners and investors will get hammered by a mammoth tax increase beginning with their first pay check, or dividend check in January 2011. Apart from the large transfer of wealth from the private sector to the public sector, what are the likely impacts?

For an indirect measure of the impact, we can examine the growth differences of states with the lowest income tax rates and those with the highest income tax rates over the past decade. On the low end, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no personal income tax. At the other end of the spectrum California, Idaho, Iowa, Maine, Minnesota, New Jersey, New York, Oregon, and Vermont have the most burdensome individual income taxes with a median rate of 9.0%. This means that if you live in one of the high tax states and earn $100,000, your take home pay will be as much as $9,000 less than if you lived in one of the “no tax” states.

Additionally, yearly economic growth between 2000 and 2008, as measured by GDP, was 7.5 percent for the no tax states and 5.5 percent for the high tax states. In terms of jobs, the low tax states experienced job growth of 5.4 percent between 2000 and 2010 while the high tax states suffered job contraction of 2.8 percent. For the lame duck Congress the message is clear; failure to extend the Bush tax cuts will stifle growth and potentially push the economy back into recessionary territory. Ernie Goss

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