Florida’s Low State Tax Burden Boosts Labor Force and Growth

This piece was first published in the Tallahassee Democrat.

More than 1 million people have migrated to Florida since 2000. The influx continues at a rate of about 300,000 people per year. This population growth has helped propel the state to the third largest in the nation, with annual economic output of $1 trillion. A critical ingredient to this growth has been Florida’s historically low tax burden compared to other states.

Many reasons influence where individuals choose to reside, including weather, employment opportunities and housing costs, but economic theory suggests that state tax rates matter.

The Tax Foundation in Washington, D.C., finds that taxes are one of several factors influencing where businesses choose to locate in a world with mobile labor and capital. States with more favorable tax systems can more effectively compete for new or expanding business and individuals planning on relocating.

Academic evidence supports these claims. For example, Florida’s decision to not levy a state income tax helps attract scientists and other high-income earners. Economists Enrico Moretti and Daniel Wilson found that each additional 1 percent increase in personal income tax led to a 1.6 percent out-migration of high-level scientists.

They also found slightly higher effects for state corporate income taxes, with a negative mobility response of 2.3 percent. Moretti and Wilson concluded that other highly-skilled workers likely have similar sensitivity to state taxes. Not surprisingly, FSU economist Randall G. Holcombe and Donald Lacombe found that states that raised their income tax rates more than neighboring states experienced a 3.4 percent reduction in per capita income from 1960 to 1990.

The effects are not just on population migration. A meta-analysis of 84 econometric studies by Timothy Bartik at the W.E. Upjohn Institute found taxes have a significant and sizeable effect on business activity. J. William Harden and William Hoyt, writing in the National Tax Journal, believe a consensus has emerged within the economics profession that state and local taxes negatively affect state employment levels, which in turn reduces a state’s attractiveness.

During a time when federal, state and local taxes and liabilities have increased, Florida has remained fiscally responsible and kept its tax rates relatively low. Florida is one of the seven states with no income tax and strong growth, alongside other states such as Nevada, Texas and Washington.

The Tax Foundation ranks Florida 34th lowest in overall state and local tax burden. Florida is ranked number one in the country for state fiscal health by the Mercatus Center at George Mason University. Florida’s prospects for continuing this track record of economic growth are good as long as state and local policymakers stay the course and remain fiscally responsible.

636676937768684989-NicholasSpaunburgh2018.jpgNicholas Spaunburgh was a data analytics undergraduate research assistant in the DeVoe L. Moore Center. He graduated last May with a degree in economics and a minor in statistics. This commentary is based on research he presented at the 43rd Annual Meetings of the Association of Private Enterprise Education in April 2018.


The feature image is from Wikipedia.

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