New Census Data Show Low-Tax States Better at Reducing Poverty
By Goldwater Institute: Matthew Ladner, PhD (12/22/06)
Which states are successfully fighting poverty, and which are failing? You may be surprised.
Many people believe that government should play the role of Robin Hood. Through progressive taxation, spending and redistribution, proponents believe government will reduce poverty.
Most economists, however, argue that the best way to reduce poverty is economic growth. They say more growth means more jobs, a surefire anti-poverty plan.
A new study, How to Win the War on Poverty: An Analysis of State Poverty Trends, tests these different theories by examining state poverty rates from 1990-2000.
In the mid 1990s, the federal government eliminated its largest welfare program, replacing it with a system of block grants to the states. In essence, the federal government admitted its failure in administering welfare and looked to the states to serve as “laboratories of reform” in the War on Poverty.
Nationwide, the states took great strides in reducing both general and childhood poverty. Poverty fell by 5.3 percent and childhood poverty by 9.4 percent. Some states, however, reduced poverty much more than others, while some states suffered large increases. For example, Colorado reduced its childhood poverty rate by almost 27 percent. Meanwhile, Rhode Island saw its childhood poverty rate increase by almost the same amount. What accounts for those differences?
Using data from the Census Bureau, the Goldwater Institute report finds that states with the lowest tax rates enjoyed sizeable decreases in poverty. For example, the 10 states with the lowest state and local tax burdens saw an average poverty reduction of 13 percent--two times better than the national average. The 10 highest tax states, meanwhile, suffered an average increase in poverty of 3 percent.
Some high tax states, such as California, Hawaii and New York, suffered catastrophic increases in poverty. As California began to reject the low tax legacy of the Reagan governorship, the state’s poverty rate jumped 13 percent. Some will be quick to dismiss this as a consequence of illegal immigration. But lower-tax, border-states such as Arizona and Texas had substantial declines in poverty while also experiencing equivalent increases in immigration.
In fact, California’s high taxation has been so damaging to the economy that it is on track to having a higher percentage of its population living in poverty by 2010 than Mississippi.
When a state has a low tax burden, economic growth is stronger. Economic growth delivers more job creation and higher per capita and median family incomes. Economic growth is a powerful means to pull people out of poverty.
The report also grades each state’s progress in reducing both general and childhood poverty. Arizona received a B in poverty reduction for decreasing the general poverty rate by 11.5 percent and the childhood poverty rate by 12.1 percent.
Although some policymakers justify high taxes for the sake of the poor, the data show that higher taxes and related spending do little to reduce poverty rates. Rather, states with healthy economic climates have much more success in lifting people out of poverty.
The causes of, and solutions to, poverty are complex, but one policy is clear: low tax rates are a significant factor in achieving the universal goal of poverty reduction.
By Matthew Ladner, PhD, vice president for research at the Phoenix-based Goldwater Institute, http://www.goldwaterinstitute.org/
http://www.goldwaterinstitute.org/aboutus/ArticleView.aspx?id=1233
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