Does The Mix Of A State?s Tax Portfolio Matter? An Empirical Analysis Of United States Tax Portfolios And The Relationship To Levels And Growth In Real Per Capita Gross State Product

Abstract

An important part of the economic environment for any business is the tax climate. At the federal level, arguments are often made for abandoning the income tax in favor of a national sales tax or other type of tax. At the state level, the United States has a laboratory of sorts for examining the economic impact of various types of taxes. The states exhibit a wide degree of variation in the kinds and mix of taxes upon which they rely to raise revenue. This provides an opportunity for comparing economic well-being with the mix of taxes for the various states. This paper presents the results of an empirical study of the relationship between the relative economic well-being of a state and its relative portfolio of taxation. Data on the kinds and relative mix of taxes for the 50 United States for the years 1993-1999 are summarized. While the direction of causation is still an issue, the results of the study show that statistically significant relationships do exist between a state’s tax portfolio and its level and growth of real per capita gross state product. Hopefully this study will add to our understanding of the impact of taxation on the economic climate for business.