Proponents of high taxes are again quoting a study from the Institute for Taxation and Economic Policy (ITEP).  The study argues high-income tax states perform as well or better than states without-an-income tax. 

The study's result runs contrary to findings by the Organization for Economic Co-operation and Development (OECD), a Paris-based organization comprised of 34 developed countries, including the United States.  The OECD study concluded: Growth-oriented tax reform measures include tax base broadening and a reduction in the top marginal personal income tax rates.

ITEP comes to their counter-intuitive conclusion by carefully choosing three measures: Per Capita Real Gross State Product (GSP) Growth, Real Median Household Income Growth and Average Annual Unemployment rate. One needs only a simple drawing to see why these variables are inappropriate measures.

In the first scenario our state has nine individuals; seven earning an income and two unemployed.  GSP per capita is $3, Real Median Household Income is also $3, the Unemployment Rate is 22 percent and our overall wealth is $28.  Now suppose the four low-income individuals decide to seek opportunities in another state.  Now our state looks like this:

Our GSP per capita and Real Household Median Income rose to $5, the Unemployment Rate decreased to 0 and our overall wealth declined to $25. The out migration of low income earners caused our GSP per capita and Real Household Median Income to grow 66 percent and our Unemployment rate to drop 100 percent.  Although, not one person’s wealth increased and in fact our state is worse off, we have fewer jobs and less wealth.

This is precisely what the IRS' Adjusted Gross Income (AGI) data suggests is happening. From 2000 to 2009 the average AGI for each tax return leaving the nine states with the highest-income taxes was $59,502 (2010 dollars), which is $5,000 lower than the average AGI for all tax returns in those nine states, over the same period.  Now we see why ITEP carefully chose those measures.

Thanks to this map, put together by the Tax Foundation, we can see that the nine states without-an-income tax gained $117.6 billion from interstate migration whilst the nine high-income tax states lost $105.8 billion between 1999 and 2009.  Data from the Census Bureau shows that during this time nearly 4 million fled the high-income tax states, while nearly 3 million found a new home in the states without-an-income tax.  Just as the pictures above illustrate; ITEP’s chosen measures can go up, even as wealth leaves.