Before jumping to conclusions about the impact of the income tax on a state’s economic performance, let’s look at the facts and the data. How have the economies of Missouri and Tennessee performed over the last ten-plus years?

Let’s start by looking at the gross state product (GSP) as reported by the Bureau of Economic Analysis (BEA). In 1997, Missouri’s GSP was $157 billion and Tennessee’s was $153 billion; in other words, Missouri’s economy was 102.82% of TN’s. By 2008, just before the financial crisis, Missouri’s economy had grown to $241 billion while Tennessee’s reached $248 billion. In other words Missouri’s economy is now 97.25% the size of Tennessee’s, suggesting that Tennessee grew faster than Missouri during the past 11 years. This is in fact the case, as can be seen by computing the compounded average growth rates (CAGR) for Missouri and Tennessee. Over the last 11 years Missouri grew at 3.9407% per year while Tennessee grew by 4.4680% per year. The difference, 0.5273% per year, may appear very small but over time adds up to a lot. A tiny difference of half a percentage point per year compounded over 11 years has led Tennessee’s economy from being $4 billion smaller than MO’s, to being $7 billion larger. In other words, Tennessee’s economy created $11 billion dollars more wealth during the same 11-year period than Missouri’s did.

Headline numbers like gross state product (GSP) can obscure important facts because they aggregate and average a lot of data. The Bureau of Economic Analysis (BEA) breaks out detailed accounts such as private industry production, the government sector and the state and local government subcomponent. Therefore, looking at the subcomponents of GSP gives a more complete picture.

FFirst, let’s compare private industry growth. In 1997, private industry accounted for $140 billion and $136 billion in Missouri and Tennessee respectively. In 2008, these same numbers were $211 billion and $220 for Missouri and Tennessee respectively. These numbers imply compounded annual growth rates (CAGR) of 3.8090% and 4.5055% for Missouri and Tennessee respectively (a difference of 0.6965% per year). In Missouri, the private industry component grew slower than the GSP, suggesting that other components, such as the government sector, must have grown faster than average GSP. In contrast to this, private business in Tennessee grew faster than the overall economy in Tennessee, both of which expanded faster than Missouri’s GSP.

Second, let’s look at the state and local sector’s contribution to the GSP. It’s important to note that these figures include goods and services paid for directly by the state and local government and do not include transfer payments and other forms of welfare. State and local government accounted for $12 billion in both Missouri and Tennessee in 1997. By 2008, these figures totaled $21 billion and $20 billion in Missouri and Tennessee, implying a CAGR of 5.0897% for MO and 4.8562% in TN. This suggests that while both states’ economies grew, the government sector grew faster that did the GSP in both states.

Finally, it is worth looking at a few other measures, such as median incomes, population growth and median home values, all of which are reported by the Census Bureau and are summarized in the table below.

Over the last eight years, income per capita appears to have grown at basically the same rate in both states. While median home values appear to be growing more rapidly in Missouri based on CAGR numbers, home values are subject to a great degree of measurement uncertainty and are therefore much less telling than other measures. The only figure that really merits attention is the significantly more rapid rise of Tennessee’s population compared to that of Missouri. The difference in population growth over the past eight years is about 300,000 people in Tennessee’s favor – approximately the entire population of the City of St Louis.

While many possible differences between Missouri and Tennessee can be used to explain their different records of economic performance, it is impossible to argue with the data, which shows that Tennessee’s economy has grown faster than Missouri’s. It is also impossible to deny that taxes matter when individuals and businesses are deciding where to work or locate. Eliminating the state income tax in Missouri can make the Show-Me state a magnet for attracting individuals and businesses from across state lines.

In this short article, the data has demonstrated the superior economic growth rate of Tennessee: a no-income tax, pro-business state. The debate about repealing the income tax in Missouri is not a debate about how to replace the tax or what to exempt from taxation. The debate about repealing the income tax should be about how to best create an environment that fosters dynamic economic growth and job creation for Missouri in the 21^st century.

The drive toward dynamic economic growth for the Show-ME State economy is an important one to institute. That’s why we were fortunate to have Dr. Art Laffer of Laffer & Associates present his views on how Missouri’s economy can grow by replacing our state income tax with a broad-based sales tax system.