Report Shows that Raising Taxes in a Recession Does Not Harm a State's Economic Performance

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TABLE 1: ANNUAL ECONOMIC GROWTH BY VARIOUS INDICATORS, 2004-2007.
	Average Annual Growth Rates
Indicator	States that Increased Taxes Significantly	National Average
Total Personal Income	6.1%	6.2%
Employment	1.6%	1.7%
Median Wage	3.1%	3.1%
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, and CBPP calculations of data from the NCSL and state revenue departments. Note: States were grouped according the amount of gross tax increases between late 2001 and 2004. States that increased taxes significantly are those that enacted cumulative increases of at least 1 percent of the previous year's tax revenues.

 As Table 1 shows, states that had enacted significant tax increases (more than 1 percent of revenues) in the 2002-04 period saw growth rates in personal income, employment, and the median wage from 2004 to 2007 that closely matched national averages. Furthermore, a number of states that enacted significant tax increases during the early 2000s subsequently experienced above-average growth in these key economic indicators.

 ■North Carolina, for example, raised taxes by about 3.5 percent of revenues during the last downturn. From 2004 to 2007, total personal income in the state grew by about 6.7 percent each year compared to the nationwide rate of 6.2 percent during this period. North Carolina experienced faster-than-average growth in employment following the last recession, growing about 2.5 percent each year from 2004 to 2007. Nationwide, employment grew at an annual rate of 1.7 percent during this period.

■Similarly, growth in total personal income and employment from 2004 to 2007 exceeded national averages in South Carolina, Virginia, and Washington — all of which enacted significant tax increases during the recession of the early 2000s.

On the other hand, a number of states that did not raise taxes, or cut them, during the last recession subsequently saw slower-than-average economic growth. Among them are Iowa, Kentucky, Minnesota, Missouri, New Hampshire, and Wisconsin. Those states’ decision to avoid tax increases (and, in some cases, to enact large cuts in services) failed to protect them from below-average growth in both personal income and employment during the subsequent period.

 In short, neither economic theory nor experience supports the idea that states should shy away from raising taxes in a recession for fear of harming their economic  performance.