The Hidden Cost of the Income Tax

By Stephen Slivinski, Goldwater Institute

Decades of experience have shown us that high taxes dampen economic growth. State policymakers hoping to encourage job growth are right to worry about their state’s tax load on the private sector.

What needs more attention than it gets now is what a state taxes. As it turns out, most states actually rely on the very tax that slows job growth the most: the income tax.

Most states, for instance, assess higher income tax rates on those with higher incomes. Not only does that penalize those who are most successful in the private sector, it inhibits job growth by making small businesses – which are typically the creators of the largest share of jobs in most states and pay their income taxes through the personal income tax code – pay higher taxes the more they grow.

States with graduated-rate income taxes, like Arizona, also tend to see government revenues grow faster than personal incomes and that means the government gets richer faster than the private sector. That’s always bad for long-term economic growth.

The best way out of the trap is to eliminate the tax that is the most damaging to economic growth. Eliminating the income tax in Arizona could not only remedy these problems but also help launch the state into the ranks of the economic powerhouses like Texas. This policy change could still create more than 20,000 new jobs in the first year because it gets rid of the hidden economic costs associated with an income tax.

Every state has natural advantages and disadvantages that policymakers cannot control. But they can control tax policy. Getting rid of the income tax is the only policy bold enough to fundamentally boost long-term economic growth in Arizona.

Stephen Slivinski is a senior economist at the Goldwater Institute.

Learn more:

Goldwater Institute: A New Tax Plan for a New Economy: How Eliminating the Income Tax Can Create Jobs

Cato Institute: State Income Taxes and Economic Growth

National Taxpayers Union Foundation: The Economic Impact of the Adoption of a State Income Tax in New Hampshire


  1. Gee, this is the second state income tax whine this week by the in-duh-tute. As Conservative American pointed out before, elimination of state income tax would simply increase property taxes and sales taxes to make up the difference. Pay me now or pay me later.

    Why is the in-duh-tute wasting everybody’s time with this stupidity, instead of spewing out op-eds against Prop 204 which will stick Arizonans with a LIFETIME annual billion dollar tax? Whose running the joint over at the in-duh-tute? Acid heads?

  2. Conservative American says

    Yup, zoo, the in-duh-tute is like a chicken running around with it’s head cut off. It’s too stupid to realize when it’s already dead, LOL! 😉

    Hey, Stephen Slivinski, I have a great idea based upon your “logic”. Let’s do away with taxes completely; federal, state, local. No taxes at all in any way on anything. Wow, that would REALLY stimulate growth! Growth, growth and nothing but growth! Right?

    But, you say, how would we pay for necessary public projects and services. Not to worry, Stephen. I have a plan! Here’s how it works!

    Every year we would seize all of the assets of the Goldwater Institute, it’s employees and it’s supporters. Then, we would liquidate those assets and use them to pay for public projects and services. You shouldn’t mind making the sacrifice so that we can do away with taxes. Problem solved!

  3. If high taxes dampen economic growth, then how do you explain the higher tax rates under Clinton, which led to a SURPLUS AND 23 MILLION JOBS????

    Using your logic, the low tax rates instituted during the W years would have continued that trend started under Clinton. Instead we had stagnating wages, very little economic growth and an exploding deficit.

    Lower taxes does not lead to jobs, DEMAND FOR PRODUCTS AND SERVICES LEADS TO JOBS!! It’s Economics 101. Trickle down economics has led to nothing but increased income inequality.

    And Texas as an economic powerhouse? Sure, if you count low-wage, no benefits jobs as a good thing.

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