Tax Progressivity and State Economic Performance

Abstract

Principles offiscal federalism suggest that subnational units of government should rely on benefits-received financing, implying regressivity in state and local taxes. Empirically, however, states and their localities vary enormously in the degree of progressivity of their tax systems. This article investigates the effect of tax progressivity on economic growth. Using a pooled cross-section model from 1977 to 1993, the author found that the degree of progressivity has no effect on the rate of growth of state personal income per capita. Measuring growth rates over the entire period, the author found that progressivity has a significant negative effect on economic growth. The long-period result is driven by the high growth rates of a small number of northeastern states, who benefited from strong regional growth and their tax haven status adjacent to more progressive states. The weak progressivity effect suggests that there is considerable scope for differences in tax incidence across states.