Low State Tax Rates Don't Spur Economic Growth

Low State Tax Rates Don't Spur Economic Growth

Study finds technology and entrepreneurship are better job generators.

Lower state tax rates don't spur economic growth. They're not statistically associated. In fact, state spending habits may be much more so. That's the bottom line of a study involving Penn State, Ohio State and Oklahoma State researchers.

And, it's bad news for states solely focused on low tax rates. Stephan Goetz, director of the Northeast Regional Center for Rural Development at Penn State University, says that states favoring low taxes don't necessarily spend funds efficiently. They may skimp on funding needed for public services such as road maintenance and education.

Those costs often are transferred to businesses directly or become obstacles for businesses seeking to attract qualified workers. Goetz said. "You can't attract businesses," he adds, "if you can't provide needed public services."

The study found that policies promoting use of high technology and entrepreneurship are significantly correlated with job creation and economic growth. States with more technology classes in school, higher domain name registrations and more people online tended to economically outperform states with a lower emphasis on technology.

"States that have already moved into the online economy are better able to create jobs," Goetz said.

Race to the bottom . . . or the top?

Lowering taxes often is categorized as a race-to-the-bottom policy. Investing in technology is considered a race-to-the-top strategy.

"Race-to-the-top policies are generally defined as those involving investments in education, entrepreneurship and infrastructure," explains Goetz. "In contrast, race-to-the-bottom policies involve competition among the states for jobs by using lower taxes and industrial recruitment incentives."

Finding the right mix of race-to-the-top and race-to-the-bottom policies to stir economic recovery is of growing importance for state officials. "It's especially important with the lackluster economy and the threat of a possible double-dip recession," he concludes.

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