President Obama’s State of the Union address has produced a polarizing effect on the nation; some fully support him while others express serious concerns about his growing propensity to ignore federal law and act “unilaterally.” President Obama recognized many of the nation’s problems, from high corporate income taxes to stalling incomes. Fortunately, we need not implement Obama’s flawed solutions or start from scratch. The fixes to many of our nation’s problems are found in the pro-growth and limited government reforms that have been implemented throughout the states.
Unemployment is one such problem. The President said during his address the United States has “the lowest unemployment rate in over five years.” This is mainly because so many people have dropped out of the U.S. workforce, stopped looking for work and therefore no longer count in the U.S. unemployment rate. A more accurate way to assess the market would be to analyze job growth. This measures the total number of jobs that were added over a given time period. States that have taken the President’s advice and have moved to raise taxes on “high earners” have learned the hard way that taking money out of people’s pockets does not help grow the economy. In fact, from 2001 to 2011, the nine states with the highest personal income taxes have increased their total employment by only 4.9 percent. Over the same time period, the nine states with no personal income taxes saw their total employment grow by 12.7 percent, more than double. The no income tax states also saw state revenue grow by 76.3 percent due to economic growth compared with only 47.9 percent growth from their high tax counterparts. Now that’s deficit reduction.
The State of the Union also focused on the need for corporate income tax reform. The United States has the highest corporate income tax rate in the world; this issue must be addressed if America wants to remain competitive with the rest of the world. It is refreshing to see that the President, at least in broad principle, admits that tax rates matter to attract businesses and grow the economy. The U.S. tax code is enormously burdensome and complex. The best move for economic growth and attracting businesses is reducing the top tax rates and broadening the tax base, preferably by closing economically damaging tax preferences for favored industries (like those enjoyed by Solyndra). This type of revenue-neutral tax reform is good, but lowering taxes altogether and letting Americans keep more of what they earn is great. This is another area where states have learned that lesson already and understand what cutting taxes means for economic growth. In the 2013 legislative session, more than a third of U.S. states voted to cut taxes for their citizens. Washington should take a lesson.
Making sure that middle class wages do not stall is another problem the President sought to address. Of course, his solution is to raise the minimum wage and force many low-income and low-skilled workers out of the jobs they have.
“Tonight, I ask more of America’s business leaders to follow John’s lead and do what you can to raise your employees’ wages,” President Obama said during his speech. Of course, if he gets his way, they will not have a choice. Making labor more expensive for businesses (i.e. making it more expensive for employers to hire people) is well known to contribute to much higher rates of unemployment. Once again, the lesson from the states is illustrative. The latest state unemployment data shows that North Dakota, Nebraska, South Dakota, Utah, and Iowa are the five states with the lowest state unemployment rates and have the minimum wage set at the federally mandated floor of $7.25 per hour. Rhode Island, Nevada, Illinois, Michigan, and California, by contrast, are the five states with the highest state unemployment rates. Unsurprisingly, all of them have a state minimum wage that is higher than the federally mandated floor.
When it comes to solving America’s challenges, the states provide an excellent source of knowledge as to what works and what does not. Free market and limited government policies allow states to prosper and could allow the country as a whole to prosper as well. Perhaps next year, President Obama will take a look at some of these examples.
Ben Wilterdink is a research analyst at the American Legislative Exchange Council’s Center for State Fiscal Reform. President Obama image courtesy of Big Stock Photo.