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Cali ornia Prosperity

Cali ornias tax system, comparisonswith other states, and the path to

re orm in the Golden State

by Robert P. Murphy , Ph.D.and Jason Clemens

Taxi ornia:

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Cali ornias tax system, comparisonswith other states, and the path to

re orm in the Golden State

by Robert P. Murphy, Ph.D.

and Jason Clemens

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Taxifornia:Californias tax system, comparisons to other states, and the path to reform in the Golden Stateby Robert P. Murphy, Ph.D., and Jason ClemensMarch 2010

Paci c Research InstituteOne Embarcadero Center, Suite 350San Francisco, CA 94111 Tel: 415-989-0833/ 800-276-7600Fax: 415-989-2411Email: in o@paci cresearch.org www.paci cresearch.org

Download copies o this study at www.paci cresearch.org.

Nothing contained in this report is to be construed as necessarily refecting the views o the Paci cResearch Institute or as an attempt to thwart or aid the passage o any legislation.

2010 Paci c Research Institute. All rights reserved. No part o this publication may be reproduced,stored in a retrieval system, or transmitted in any orm or by any means, electronic, mechanical,photocopy, recording, or otherwise, without prior written consent o the publisher.

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CONTENTS

Acknowledgements ............................................................................................... 3

Executive Summary ............................................................................................... 4

Introduction................ ..........................................................................................15

I. Research on the E ects o Taxes .......................................................................17

1. Taxes and Behavior ..............................................................................17

Tax Rates and Progressivity .........................................................17

Taxes and Labor ..........................................................................18

Taxes and Investment ..................................................................19

Taxes and Entrepreneurship ....................................................... 21

2. Tax Structure: Di erent Taxes Impose Di erent Costs ........................ 22Marginal E fciency Cost o Taxes: Not All Taxes Are Equal ......... 24

3. Conclusion and Implications o Tax Research .................................... 26

II. Measuring the Burden o Government ............................................................ 27

III. Measuring Tax Structures .............................................................................. 32

1. Personal Income Tax ........................................................................... 32

2. Corporate Income Tax ......................................................................... 39

3. Capital-Based Taxes ........................................................................... 454. Sales Tax ............................................................................................. 50

5. Property Tax ........................................................................................ 55

6. Overall Scores and Ranking or Tax Structure ..................................... 58

IV. Composite Rankings, Discussion, and Recommendations ........................... 61

1. Observations ....................................................................................... 61

2. Recommendations .............................................................................. 64

Appendix ............................. ............................................................................... 67

Endnotes ....................... ..................................................................................... 69

About the Authors .... ......................................................................................... 79

Statement o Research Quality ........................................................................... 80

About the Pacifc Research Institute................. .................................................. 81

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Cali ornia Prosperity 3Cali ornia Prosperity 3

Acknowledgements

Te authors would like to thank the Searle Freedom rust or its generous contribution. Withoutits nancial support, this study could not have been completed. Te authors would like to recognizeKarrie Ru er and Julie Kaszton, research interns at the Paci c Research Institute, who providedinvaluable assistance throughout the research process. Te authors also thank Niels Veldhuis o theFraser Institute (Canada) and Chris Edwards o the Cato Institute or their ormal review o thisstudy as well as their ongoing suggestions, and Dr. Lawrence McQuillan o the Paci c ResearchInstitute or his suggestions. All three scholars are experienced in sub-national comparisons and

provided valuable input during the research process. Any remaining errors or omissions are the soleresponsibility o the authors. As the authors o this study have worked independently, their views andconclusions do not necessarily represent those o the board, supporters, or sta o PRI.

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Cali ornia Prosperity4

Executive Summary

Taxes MatterReally

In a quest or solutions, this second installment o the Cali ornia Prosperity Project assessesCali ornias tax burden, the structure o its tax system, and how both o these a ect the statescompetitiveness. Te research on which this study is based shows that taxes matter.

When we impose taxes on certain things, we basically tend to get less o those things. axes in uencedecisions concerning work e ort, savings, investment, entrepreneurship, risk taking, and job creation. Tese are all things Cali ornia needs. Additional work, greater investing by individuals and businesses,and more entrepreneurship are the oundations or a prosperous society. Understanding how taxrates, and in particular marginal tax rates, in uence these activities is critical in understanding thechallenges acing Cali ornia.

Measuring Taxes across the States

Tis study calculates three measures o taxation: (1) burden, (2) structure, and (3) overall or composite. Tis approach is designed to measure two di erent, although interrelated, aspects o taxation: the totalamount o taxes extracted by government, along with the design or mix o taxes used.

(1) Burden o Government

Te rst measure is the total burden o government imposed in a state, or, put di erently, the extent

to which state and local governments extract resources rom the economy. o calculate the burdeno government, we computed state and local government spending as a share o the state economy (Gross State Product [GSP]) or the most recent year or which all relevant data are available (2007).

We believe that governmentspending is a more accurate measure o the size o government thanalternative measures such as tax receipts. Te main reason or this is borrowing. I governments usedebt (de erred taxes) to nance current spending, then measures o revenues will underestimate thesize and perhaps the scope o the government in question. Te nature o the reallocation rom theprivate sector to the government sector remains the same whether the spending is nanced throughrevenues or borrowing. I government spending exceeds tax receipts in a given year, that implies

higher uture taxes necessary to cover interest payments and/or to retire debt.

Second, we incorporate local government spending as well as state-level spending. Excluding localspending necessarily biases the results or state governments that have decentralized taxation and/orspending to local governments. Tis activity at the local level can be substantial. Further, there is only one set o taxpayers in a state. It is largely irrelevant to the taxpayers themselves and the incentivesthey ace whether the burden o government is imposed on them rom their state capital or their localmunicipality.

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Cali ornia Prosperity 5

Results or Burden o Government

Te results are summarized in executive summary table 1. South Dakota was the top-ranked statein this categorymeaning it had the lowest burden o governmentwith state and local spendingrepresenting 11.6 percent o its state economy (i.e., its GSP) in 2007. Delaware ranked second, withstate and local spending accounting or 12.0 percent o its state economy. Te other states in the top

ve were: exas (12.1 percent), Louisiana (12.2 percent), and New Hampshire (13.2 percent).

At the other end o the spectrum, Alaska ranked 50th, with state and local government spendingrepresenting a little more than one- th (20.2 percent) o the states economy.1 South Carolina ranked49th, with 19.4 percent o its economy consumed by state and local government spending.

Cali ornia, New York, and New Mexico rounded out the list o lowest-ranked states. New York ranked 48th, with 18.4 percent o its economy consumed by state and local government spending, while Cali ornia ranked 47th (18.3 percent) and New Mexico 46th (17.9 percent).

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Executive Summary Table 1: Summary ScoresBURDEN OF GOVERNMENT STRUCTURE OF TAX BURDEN

State

State and Local GovernmentSpending as a Percentage o GSP

(2007) (Score worst 0 -10 best) Rank

Personal IncomeTaxes

(Score 0-10)

Corporate IncomeTaxes

(Score 0-10) Alabama 3.8 38 6.0 7.5 Alaska 0.0 50 10.0 0.7

Arizona 5.4 25 6.7 7.1 Arkansas 5.8 21 4.0 5.1Cali ornia 2.2 47 1.1 6.1Colorado 6.4 12 6.9 8.2Connecticut 7.9 7 5.5 7.0Delaware 9.6 2 4.1 6.8Florida 4.0 35 10.0 7.7Georgia 5.9 20 4.5 7.7Hawaii 5.1 29 1.1 7.0Idaho 5.9 19 3.4 7.1Illinois 6.4 13 7.8 6.8Indiana 5.7 23 7.2 6.7Iowa 6.1 16 2.4 3.8Kansas 6.0 17 5.1 5.8Kentucky 4.6 32 4.6 5.7Louisiana 9.3 4 5.3 5.5Maine 3.6 40 3.0 4.4Maryland 6.2 15 3.7 6.9Massachusetts 6.0 18 5.9 5.7Michigan 3.2 43 7.3 7.4Minnesota 5.3 27 4.4 6.1Mississippi 3.7 39 6.6 6.8Missouri 6.7 11 4.8 7.8Montana 5.3 26 4.0 7.0Nebraska 3.3 42 4.6 6.4Nevada 7.8 9 10.0 10.0New Hampshire 8.2 5 9.6 5.0New Jersey 4.7 30 1.6 4.9New Mexico 2.6 46 6.0 5.5New York 2.1 48 2.2 5.4North Carolina 7.6 10 4.6 7.2North Dakota 7.9 8 6.5 5.6Ohio 3.0 45 3.9 9.4Oklahoma 6.3 14 5.1 7.5Oregon 4.1 33 1.6 6.7Pennsylvania 4.0 34 7.1 6.2Rhode Island 3.9 37 3.0 6.6

South Carolina 1.0 49 3.8 8.1South Dakota 10.0 1 10.0 9.6Tennessee 4.6 31 9.6 7.1Texas 9.4 3 10.0 10.0Utah 5.4 24 6.2 7.8Vermont 3.1 44 3.4 5.7Virginia 8.0 6 4.7 7.8Washington 3.5 41 10.0 10.0West Virginia 5.1 28 5.0 5.4Wisconsin 4.0 36 4.4 6.8Wyoming 5.7 22 10.0 10.0

Drawn rom various sources as noted in the text, with calculations by the authors.

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STRUCTURE OF TAX BURDEN COMBINED SCORECapital-Based

Taxes(Score 0-10)

Sales Taxes(Score 0-10)

Property Taxes(Score 0-10)

Total(Score0-10) Rank

Score(0-10) Rank

10.0 5.0 9.2 6.9 4 5.4 2710.0 9.4 6.6 6.7 8 3.3 46

10.0 2.2 6.1 5.5 30 5.5 2510.0 2.1 8.8 5.0 41 5.4 2610.0 2.2 6.6 4.0 45 3.1 5010.0 5.7 6.4 6.8 5 6.6 109.8 4.7 3.0 5.1 37 6.5 113.3 10.0 10.0 7.7 1 8.6 2

10.0 3.0 3.5 6.0 18 5.0 3310.0 4.5 6.3 5.8 22 5.8 1810.0 2.6 7.8 4.6 43 4.8 3510.0 3.7 7.0 5.3 33 5.6 2310.0 4.5 4.2 5.8 21 6.1 1510.0 3.3 6.2 5.9 20 5.8 2010.0 4.2 5.5 4.0 46 5.0 329.8 3.9 5.1 5.0 39 5.5 249.6 4.3 8.1 5.8 24 5.2 308.9 3.2 9.2 6.0 17 7.7 4

10.0 4.7 1.8 3.5 49 3.5 4510.0 5.0 6.2 5.5 31 5.8 169.6 4.9 4.6 5.3 35 5.6 22

10.0 4.1 2.9 5.4 32 4.3 3910.0 3.7 6.4 5.1 36 5.2 299.0 2.2 6.1 5.6 28 4.6 369.8 5.0 6.7 6.1 13 6.4 13

10.0 10.0 4.4 6.3 10 5.8 1710.0 4.0 5.0 5.0 40 4.2 4210.0 2.4 6.8 7.3 3 7.6 510.0 10.0 0.0 6.1 14 7.2 610.0 3.7 0.9 2.8 50 3.7 4410.0 2.4 9.0 5.7 26 4.2 419.9 5.0 3.9 4.1 44 3.1 489.3 5.0 7.7 6.3 11 6.9 8

10.0 4.6 6.3 5.8 25 6.8 99.1 4.3 5.2 5.7 27 4.3 389.7 4.7 8.8 6.5 9 6.4 12

10.0 10.0 6.2 6.1 15 5.1 3110.0 4.5 5.2 5.8 23 4.9 3410.0 3.7 2.0 3.8 47 3.9 43

10.0 4.0 5.4 5.3 34 3.1 4910.0 4.3 6.6 7.6 2 8.8 18.8 1.8 7.8 6.7 6 5.7 215.9 3.5 5.0 6.1 16 7.7 3

10.0 3.2 7.6 6.2 12 5.8 1910.0 4.9 0.1 3.5 48 3.3 4710.0 5.5 5.9 6.0 19 7.0 72.5 1.3 6.5 5.1 38 4.3 409.1 4.3 7.5 5.6 29 5.3 28

10.0 4.8 3.5 4.9 42 4.4 3710.0 3.9 3.0 6.7 7 6.2 14

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(2) Structure o Taxes

It is a question not merely o theamount o resources extracted by the government, but also o howthose resources are obtained. Te second part o the study concerns itsel with how the tax burden isdesigned or structured. Te structures o ve major taxespersonal income tax, corporate income tax,capital-based taxes, sales tax, and property taxwere analyzed.

i. Personal Income ax

Tree aspects o the personal income tax were examined: the top statutory personal income tax rate,the progressivity o personal income tax rates, and the e ective rate o personal income taxes.

Te seven states that do not impose a personal income taxtied or rst place: Alaska, Florida, Nevada, South Dakota,

exas, Washington, and Wyoming. ennessee and New Hampshire also rank high, eighth and ninth respectively,based largely on the act that they impose personal income taxonly on investment income. Illinois ranked 10th overall but

rst among the states that impose personal income tax on allincome.

Cali ornia ranked dead last (50th) or personal income tax. It received a score o 1.1 out o a possible10.0. I policy makers want to understand why the Golden States economy is lagging behind those o other states, the punitive and steeply progressive personal income tax is a good place to start looking.

Other low-ranking (poor-per orming) states were Hawaii (49th), New Jersey (48th), Oregon (47th),and New York (46th).

ii. Corporate Income ax

Te statutory tax rate, progressivity, and e ective rate were assessed or corporate income tax. Fourstates tied or the top position, because they do not impose a corporate income tax: Nevada, exas, Washington, and Wyoming. South Dakota, Ohio, and Colorado also ranked high.

Alaska ranked lowest on this measure. Cali ornia ranked 34th overall or corporate income tax.

iii. Capital-Based axes

Several states levy taxes on a rms capital base, through a tax on gross receipts or a direct tax oncapital. Tese types o capital-based taxes need to be considered alongside corporate income taxes.

Te lowest-ranked state was Washington. Delaware, and exas all ranked low or their reliance oncapital-based taxes.

I policy makers want tounderstand why the Golden

States economy is laggingbehind those o other states, thepunitive and steeply progressivepersonal income tax is a good

place to start looking.

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Cali ornia does not have a capital-based tax and so, like most states, received a 10.0. Indeed, 33 statesortunately avoid using this type o tax, which imposes enormous economic costs on society.

iv. Sales ax

Consumption taxes are actually among the most efcient (least costly) ways o raising revenue. Tisis especially true i the sales tax base is broad (i.e., the tax is levied on most items) and the rate is low.Relying on sales or consumption taxes more broadly imposes ewer economic costs on society andallows or a more prosperous state.

Even so, consumption taxes do draw resources away rom theprivate sector, and there ore our ranking penalizes states thathave a high sales tax. Te our states with no sales tax at any level(Delaware, Montana, New Hampshire, and Oregon) receivedthe highest overall ranking in this category. Washington was thelowest-ranked state.

Cali ornia did poorly in this category with an overall rank o 45th. On the statutory rate Cali orniacame in dead last: its sales tax rate o 8.25 percent is the highest in the country. Its sales tax receipts asa share o personal disposable income was ranked 35th.

v. Property ax

Although Cali ornians are politically sensitive to property taxes, as demonstrated by Proposition 13, aproperty tax, depending on its design, can be a airly efcient (low cost) type o tax. Although punitivetaxes o anysort are destructive, property taxes do not, relatively speaking, distort economic behavioras much as income or capital-based taxes.

Delaware ranked highest on this measure, with 0.9 percent o its Gross State Product taken in theorm o property taxes (state and local). Te lowest-ranked state was New Hampshire, which took 5.0

percent o GSP through property taxes.

Cali ornia per ormed airly well on this measure, 17th in the nation. However, given the legacy o Proposition 13 and the tremendous political battles that preceded and ollowed it, one would haveexpected Cali ornia to score much better. It is interesting that the oes o Proposition 13 placeso much blame on it or Cali ornias periodic budgetary crises, when 16 other states have smallerproperty-tax burdens.

Overall Scores and Ranking or Tax Structure

Delaware ranked rst or its tax structure or mix, with an overall score o 7.7 out o a possible 10.0(executive summary table 1). Te other states in the top ve were South Dakota (7.6), Nevada (7.3),

Cali ornia came in dead last:its sales tax rate o 8.25percent is the highest in

the country.

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Alabama (6.9), and Colorado (6.8). Its important to note, however, that these top-per orming statesdid not have overly strong scores in an absolute sense, as witnessed by top-ranked Delawares 7.7 outo a possible 10.0.

Te lowest-ranked state was New Jersey (2.8). Other low-ranking states were Maine (49th), Vermont

(48th), Rhode Island (47th), and Iowa (46th). Cali ornia also per ormed poorly, with a score o 4.0(out o a possible 10.0) and a ranking o 45th .

(3) Composite Rankings, Discussion and Recommendations

South Dakota ranked rst, with an overall score o 8.8 out o a possible 10.0 (executive summary table1 and executive summary gure 1) when the scores rom the burden o government are combined with those or the design or structure o the tax burden. Te others in the top ve were Delaware(8.6), exas (7.7), Louisiana (7.7), and Nevada (7.6).

Te lowest-ranked state was Cali ornia, with a dismal score o 3.1 out o a possible 10.0. It rankedabove-average in the areas o property and corporate income taxes, but in all other major areasCali ornia ranked among the worst o all the states. Indeed, it ranked last on personal income taxesand had the ourth-largest burden o government. Other low-ranking states were South Carolina(49th, with a score o 3.1), New York (48th, with a score o 3.1), Vermont (47th, with a score o 3.3),and Alaska (46th, with a score o 3.3).

Exec Summ Figure 1: Combined Overall Score (worst 0-10 best)

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

CaliforniaSouth Carolina

New YorkVermont Alaska

MaineNew Jersey

Rhode IslandNebraska

New MexicoWashington

MichiganOhio

WisconsinMississippi

HawaiiPennsylvania

FloridaIowa

OregonKentucky

MinnesotaWest Virginia

Alabama Arkansas

ArizonaKansas

IdahoMassachusetts

TennesseeIndiana

UtahGeorgia

MontanaMaryland

IllinoisWyoming

MissouriOklahoma

ConnecticutColorado

North DakotaNorth Carolina

VirginiaNew Hampshire

NevadaLouisiana

TexasDelaware

South Dakota

Score (0-10)

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Cali ornias Per ormance: Big Taxes, Ine fcient Structure

Cali ornia ranks dead last or the combination o its burden o government and its structure o taxes. Te state imposes the ourth-largest burden o government among the states. Te most recent datashow Cali ornia state and local government spending at 18.3 percent o the states economy.

In the mix and design o its major taxes, which include personal and corporate income taxes,capital-based taxes, sales taxes, and property taxes, Cali ornia ranks 45th in the country.Some o the highlights:

Personal Income Taxes: 50th Corporate Income Taxes: 34th

Sales Taxes: 45th Property Taxes: 17th

Competitiveness

Tere is another angle to these data that we need to acknowledge and understand, which is thatCali ornias per ormance does not exist in a vacuum. Whether we are considering other Southwesternstates or other West Coast states, only Washington per orms anywhere near as poorly as Cali ornia interms o burden o government and tax structure. Businesses and entrepreneurs are sensitive to taxes,and Cali ornia is simply not tax-competitive with its neighbors.

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CaliforniaSCORE: 3.1RANK: #50

OregonSCORE: 5.1

RANK: #31

WashingtonSCORE: 4.3

RANK: #40

NevadaSCORE: 7.6

RANK: #5

ArizonaSCORE: 5.5

RANK: #25

UtahSCORE: 5.8

RANK: #19

IdahoSCORE: 5.6

RANK: #23

This map shows the states overall score out o 10,and where they rank.

OVERALL SCORE(Tax Burden and Structure)

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Recommendations

Governments should pursue tax policies that promote economic growth and prosperity, and they should avoid costly and damaging taxes. Tis requires using low-cost taxes like consumption taxes asthe primary source o revenue. More costly taxes, such as personal and corporate income taxes andcapital-based taxes, should be avoided or at the very least minimized.

Tose states that choose to use income taxes, whether personal or corporate, should do so in the leastdistortive manner, so as to minimize their economic impacts and costs. Tis requires that governmentsavoid multiple tax rates that increase as income goes up, and that they use the broadest base possibleupon which to assess the tax, which means avoiding the use o tax credits, deductions, and otherexemptions.

We urge policy makers as well as the general public to consider the undeniable lesson: Higher taxesespecially on income and capitalsti e entrepreneurship and lead to lower investment and slowereconomic growth. Particularly during a severe recession, when states are struggling with low taxreceipts and rising costs o social programs, there is a temptation to close budget de cits by ratchetingup tax rates that are already high.

Cali ornia-Specifc Recommendations

Not only is Cali ornia a high-tax stateas everyone already knewbut it is also anine cient -taxstate, perhaps equally troubling. From one point o view, though, Cali ornias rank o 45th on the taxstructure side is good news.

It means that through sensible tax re orm, economic growth can be osteredalong with job creation, without the need or sacri cing tax revenues tostate and local governments. Tis means shi ting rom costly income taxes,both personal and corporate, to consumption taxes. O course, once the low-hanging ruit o efcient tax re orm has been plucked, urther incentives orprivate-sector growth will have to come through reductions in Cali orniastotal tax burden, currently the ourth-highest in the nation. Cali orniashould simultaneously pursue tax re orm and tax reduction.

Our tax research suggests that one obvious candidate or immediate re orm is Cali ornias personalincome tax code, which has a top rate (10.55 percent) that is ourth-highest in the nation, and aprogressivity (spread between top and bottom rate) that is third-highest.

Perhaps the most salient lesson rom our Cali ornia Prosperity series is that the Golden State is ona dangerous downward path. Our rst report, Assessing the State o the Golden State , showed that ona series o objective measures o state economic per ormancenone o which involved government

Not only isCali ornia a high-taxstateas everyone

already knewbut itis also an ine cient-

tax state, perhapsequally troubling.

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policies per seCali ornia ranked a disappointing 38th in the nation. What the current paper showsis that the solution cant be more government spending and higher tax rates, since these are already among the highest in the nation.

Our recommendation is that policy makers break out o the

economic and scal rutnot through temporary xes, such asemergency tax hikes and other revenue gimmicks, but through agenuine commitment to shrinking the size and scope o the stateand local government, which then allows or meaning ul tax relie . Tat is the path to renewed prosperity in Cali ornia.

The solution cant be moregovernment spending andhigher tax rates, since

these are already amongthe highest in the nation.

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Introduction

Cali ornia stands in urgent need o re orm based on sound economic analysis and policy suggestions. Tere ore, the Paci c Research Institute (PRI) has launched its Cali ornia Prosperity Project, a serieso studies examining the states economic per ormance and policies.

Te rst study in this series, Assessing the State o the Golden State , looked at U.S. states across ourmeasures o economic per ormance and ound that Cali ornia ranked 38th. Te paper documented thebleak condition o the Cali ornia economy, without dwelling on explanations or this unsatis actory per ormance.

The present paper, Taxifornia , identi es causes and proposes solutions. Te study comparesCali ornias tax system to those o the other states across two broad measures: (1) burden and (2)structure2in other words, how large a tax burden is imposed on citizens as well as how that burden

is structured or designed. Te concern with the structure o taxation is based on empirical researchdemonstrating that di erent types o taxes impose di erent costs on society. In a nutshell, whatmatters is not just how muchthe government takes, but alsohowit takes it.

Assessing the State o the Golden State

Te rst installment in the Cali ornia Prosperity series documented the poor state o Cali orniaseconomy.3 We hope that the study has educated Cali ornians about the depth o the economicchallenges acing the state and the urgent need to consider undamental economic policy re orms.

Te rst study measured Cali ornias economic per ormance over the previous ve years against thoseo the other 49 states across our broad categories; Cali ornias nal ranks were as ollows:

Income: 24th Labor: 48th Migration: 44th Entrepreneurship: 16th

When the scores were combined, Cali ornia ranked 38th among the 50 states. Cali ornia alsoper ormed poorly on a regional basis. Te other West Coast states all outper ormed Cali ornia, as

did every state in the Southwest region. Indeed, most o the states in the region were among thenational leaders in economic per ormance over this period: Nevada ( rst), Arizona (third), Utah( ourth), Colorado (11th), Washington (12th), and Oregon (13th). Tis leaves Cali ornia no excuse,such as recession or regional housing crash, to explain away the dismal economic numbers; there issomething wrong that is speci c to Cali ornia.

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Some o the speci c measures in the various categories highlight the severity o the economicproblems plaguing the state:

26th in growth in per capita disposable income; 34th in the state poverty level;

33rd in private-sector job creation; seventh-highest unemployment rate over the last ve years; currently fth-highest 38th in the duration (severity) of unemployment; an average of 0.6 percent of California residents left the state (in excess of thoarriving) each year over the last ve years, resulting in a net out-migration o morethan one million Cali ornians.

Te Quest or Improved Per ormance

Given that terrible per ormance, the best approach to re orm is to examine big-picture policy areassuch as taxes. Te aim is to identi y aspects o Cali ornias tax system where changes could result inimproved per ormance, broadly de ned. Te present study examines the size and design o Cali orniastax system compared to those o the other states and within the context o scholarly research. Tis is abetter approach than attempting to implement micro re orms that a ect much smaller portions o thestate economy. Te overall objective o the study is to determine and prioritize areas o tax reductionand re orm in order to promote better economic per ormance and prosperity.

Organization

axi orniabegins with a comprehensive discussion o how taxes a ect behavior, which in turna ects economic per ormance. I taxes result in less work e ort, less savings and investment, lessentrepreneurship, and ewer business startups, the inevitable result will be a reduction in economicper ormance, meaning less wage and income growth, higher unemployment and less job creation, anda generally less dynamic and robust economy. Te review o tax research concludes with a discussiono the relative efciency o di erent types o taxes. It is this research that will identi y those particulartax policies most harm ul to economic per ormance in the state.

Te academic tax literature will also establish the scholarly oundation or our measurement sections. Te rst examines the total tax burden imposed on citizens in each state. Te second examines themix or design o the tax system in each state. As the tax research demonstrates, it is important tomeasure not only the total amount o resources the government extracts rom the private sector butalso the waythose resources are diverted. Tis is the rationale or our two-pronged approach. Tetwo measures are then combined to calculate an overall score or each states tax system. Te paperconcludes with a short section outlining recommendations or tax re orms in Cali ornia.

There is

somethingwrong that

is speci c toCali ornia.

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I. Research on the E ects o Taxes 4

Tis section reviews economic research on the impact o taxes on decisions to work, save, invest,undertake risk, and engage in entrepreneurial activity. Tis overview includes a section summarizingthe research on the economic costs o di erent taxes. Te summary will provide readers with a broadunderstanding o how taxes can negatively a ect economic per ormance by discouraging productivebehavior.

1. Taxes and Behavior

Tax Rates and Progressivity

Tis section is primarily concerned with the economic e ects o high marginal5 tax rates that increaseas people or businesses earn additional income. Te theory behind these studies is that increasing

marginal tax rates discourages people rom undertaking additional work e ort, savings, investment,and entrepreneurship by reducing the rewards to those activities as ones income increases.

wo studies by Fabio Padovano and Emma Galli con rm that high marginal tax rates have a negativee ect on overall economic growth.6 Teir 2001 study relied on data or 23 OECD countries orthe years 1951 to 1990. Tey ound that high marginal tax rates and progressivity were negatively associated with long-run economic growth. Tey ollowed up the original 2001 study with a similarresearch paper in 2002. Tey ound that a 10-percentage-point increase in marginal tax ratesdecreased the annual rate o economic growth by 0.23 percentage point.7

A number o research studies support these ndings. For example, in 1989, Reinhard Koester andRoger Kormendi, using data or 63 countries during the 1970s, ound that reducing the progressivity o the tax system (i.e., shrinking the gaps in rates between di erent tax brackets) raised the sameamount o revenue (as a share o GDP) but led to higher levels o GDP.8

A study by Elizabeth Caucutt, Selahattin Imrohoroglu, and Krishna B. Kumar, using data or the U.S.economy, ound that increasing the progressivity o taxesmeaning increasing marginal tax ratescan have important e ects on economic growth.9 In particular, they ound that a tax system with arising marginal tax rate reduced economic growth by 0.13 to 0.53 percentage point.10

Most recently, in 2007, American pro essors Christina Romer and David Romer examined the e ectso changes in the tax level on GDP growth.11 Tey concluded that tax changes had large e ects onGDP growth. Speci cally, a tax increase o 1 percent o GDP lowered output as measured by realGDP by roughly 2 to 3 percent. Tey also concluded that tax increases were linked to declines ininvestment, which ultimately reduced GDP.

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Similarly, John Mullen and Martin Williams examined state and local tax systems and comparedthem to state economic per ormance.12 Using state data rom 1969 to 1986, they concluded thatlowering marginal tax rates can have a considerable positive impact on growth and that creatinga less con scatory tax structure, while maintaining the same average level o taxation, enables sub-national governments to spur economic growth (p. 703).13 Tese are important insights or our

purposes because they highlight how a better-structured tax system canraise the same amount o revenue while promoting economic growth.14

Eric Engen and Jonathan Skinner buttress these conclusions. Tey examined more than 20 studies looking at evidence on tax rates andeconomic growth15 in the United States and abroad.16 Tey concluded

that a major tax re orm reducing all marginal rates by 5 percentage points, and average tax ratesby 2.5 percentage points, is predicted to increase long term growth rates by between 0.2 and 0.3percentage points (p. 34). Tis might appear to be a small e ect, but the cumulative and compounde ect is considerable.17

Taxes and Labor

axes in uence labor in a number o ways, by changing the a ter-tax returns people receive inexchange or their e orts and productivity. axes can in uence the number o hours worked, theintensity o the work e ort, investment in skills-development and education, and labor market entry itsel . Given the centrality o labor to any unctioning market, understanding how taxes a ect labordecisions is critical.

A plethora o academic studies examines the in uence o taxes on labor supply in terms o both hours worked and work participation.18 One o the more prominent papers is Why Do Americans Work So Much More than Europeans? by Nobel laureate Edward Prescott.19 Prescott analyzed the e ecto marginal tax rates on hours worked and employment income or the working-age population (15to 64 years old). He looked at data or the G-7 countries over the periods 197074 and 199396.20 Prescott concluded that di erences in marginal tax rates explained a large part o the di erences inhours worked in the early 1970s and the early 1990s or the United States and several Europeancountries. Speci cally, he ound that lower marginal tax rates accounted or the act that Americans worked nearly 50 percent more than Germans, French, and Italians.

Similarly, Steven Davis and Magnus Henrekson studied the e ects o national di erences in tax rateson employment income, payrolls, and consumer spending.21 Te authors suggested that higher taxrates decreased work time in the private sector and increased the size o the underground economy by decreasing the reward (a ter-tax income) to legitimate employment.22 Tey looked at data across16 Western countries over the 1990s and ound that an increase in the tax rate o 12.8 percentagepoints resulted in 122 ewer hours worked per adult annually. Tey calculated that this decline inhours worked meant a reduction o 4.9 percentage points in employment and an increase in theunderground economy o 3.8 percent o GDP.

Lowering marginaltax rates can have a

considerable positiveimpact on growth.

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A study by Emanuela Cardia, Norma Kozhaya, and Francisco J. Ruge-Murcia corroborates Prescottsndings.23 Tey analyzed the e ect o income tax changes on hours worked across several countries,

including the United States. Tey concluded that a decrease o 10 percentage points in marginal taxrates increased the weekly hours worked by between 4.5 percent (in Germany) and 18.0 percent (inthe United States).

In a recent NBER paper, Lee Ohanian, Andrea Ra o, and RichardRogerson examined the trends in average hours worked by the working-age population (15 to 64 years old) across 21 OECDcountries between 1956 and 2004.24 Te authors noticed considerable variance across countries while also noticing a general decliningtrend in average hours worked. Tey concluded that income andconsumption taxes explained the decrease in hours worked better thanother policy actors such as labor regulations, union membership, andthe size and duration o unemployment bene ts.

A number o studies have investigated the impact o taxes on labor supply in the context o taxre orms in the United States. A key contributor in this area is Harvard pro essor Martin Feldstein. Ina study published in the prestigious American Economic Review, Feldstein reviewed all major literatureavailable on the impact o the ax Re orm Act o 1986 on labor supply.25 He concluded that theconsensus in the existing research was that mens working hours and participation rates were generally insensitive to net wages (a ter-tax wages), but that married womens working hours and participationrates were substantially more sensitive. He explained, however, that the consensus was wrong toconclude that taxes did not a ect the supply o mens labor, since the amount o labor also dependedon the intensity o work e ort, the nature o the occupation, on-the-job skills training, education, andmany related actors in uenced by tax-rate changes.

Similarly, James Ziliak and Tomas Kniesner examined the e ect o income taxes on labor supply using the 1986 and 1991 U.S. tax re orms.26 Tey concluded that a 10 percent increase in net wagesresulted in increased hours worked o roughly 3 percent.

European countries also provide evidence that tax rates in uence labor supply. For example, RichardBlundell, Alan Duncan, and Costas Meghir looked at changes in British tax policy rom 1978 to1992 and the impact o those changes on the labor supply.27 Tey concluded that increases in a ter-tax wages owing to lower marginal tax rates had a positive impact on hours worked.28, 29

Taxes and Investment

High marginal tax rates reduce an investors willingness to invest by lowering the returns on theinvestment.30 A great deal o research has investigated the negative consequences o taxing investment.

They concludedthat income and

consumption taxesexplained the

decrease in hoursworked better thanother policy actors.

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One o the most in uential studies on the relationship between business taxes and investment wascompleted by Robert Hall and Dale W. Jorgenson.31 Tey calculated the e ects o tax policy changeson investment based on three major tax changes since World War II.32 Tey ound that tax policy washighly in uential in changing both the level and timing o investments, and also the composition o investments.

An important area o inquiry regarding taxes and investment is the e ect o taxes on capital spending, which is a particular type o investment. Steven Fazzari, Glenn Hubbard, and Bruce Petersen analyzedthe tax e ects on capital spending.33 Te authors looked at whether marginal and/or average tax rateshad an impact on capital investment by rms. Interestingly, they di erentiated between rms they deemed to have nancing constraints and those less constrained.34 Tey ound that lower average taxrates or rms acing nancing constraints resulted in increased unds or reinvestment in capital. Tey speci cally noted that the elimination o corporate income taxes would increase investment or rms

acing nancing constraints. In addition, they concluded that lower marginal tax rates or rms notacing signi cant nancing constraints would stimulate capital investment.

Similarly, Peter Clark investigated the behavior o businesses withrespect to equipment investment (capital) in the United Statesbetween 1953 and 1992.35 He estimated that an increase o 1 percentin taxes would decrease equipment investment by 0.40 percent. AsClark observed, equipment investment, a type o capital investment,

was quite sensitive to taxes.

Jason Cummins, Kevin Hassett, and Glenn Hubbard provided empirical evidence on the in uenceo business taxes on capital investment in a series o papers published by the Brookings Institution in Washington, D.C. 36 Te rst paper in the series examined responsiveness o capital investment (witha ocus on xed assets), using U.S. tax re orms as natural experiments. Tey concluded that investmentchanged signi cantly, as predicted, with every major business tax re orm since 1962. In other words,reductions in e ective taxes resulted in increases in investment, and increases in e ective taxes resultedin decreases in investment. In addition, they determined that the change in investment spending wasmost pronounced or those rms that experienced the greatest change in tax incentives.

A subsequent paper by Cummins, Hassett, and Hubbard expanded the scope o the study to look internationally.37 Speci cally, the authors investigated the e ect o tax re orms in 14 OECD countrieson the investment decisions o over 3,000 companies between 1981 and 1992. Te authors concludedthat tax policy changes a ected investment decisions and levels in 12 o the 14 countries over theperiod.38

Harvard economist Andrei Shlei er and his colleagues Simeon Djankov, im Ganser, CaraleeMcLiesh, and Rita Ramalho have completed an important (although not yet published) study o corporate taxes and their e ect on investment and entrepreneurship.39 Te study computed all relevanttaxes or a notional rm across 85 countries or scal 2004 and compares the results against aggregate

Lower marginal taxrates or rms not

acing signi cantnancing constraints

would stimulate capitalinvestment.

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investment, oreign direct investment, and entrepreneurship.40 Te study also di erentiated betweenthe goods-producing sector and the services sector. Te authors concluded that corporate taxes hada consistent and large adverse in uence on both investment and entrepreneurship. Speci cally,they ound that a 10-percentage-point increase in the e ective corporate tax rate reduced aggregateinvestment (compared to GDP) by 2.2 percentage points, oreign direct investment by 2.3 percentage

points, and business ormation by 1.4 percentage points. Te authors also ound that higher corporatetaxes led to a larger in ormal economy.

Finally, a paper by Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey Rosen looked athow entrepreneurs responded to tax changes in terms o capital investments.41 Tey ound that a 5percentage point rise in marginal tax rates would reduce the proportion o entrepreneurs who makenew capital investment by 10.4 percent.

Taxes and Entrepreneurship

Rising interest in entrepreneurship has generally corresponded with heightened interest in how taxesmight a ect entrepreneurial decisions. Tis section scans some o the research.

William Gentry and Glenn Hubbard examined how tax progressivity a ected the decisions by individuals to become entrepreneurs (de ned as sel -employed).42 Te authors concluded that there was evidence that a more progressive tax system reduced the likelihood o people being sel -employed, which Gentry and Hubbard used as a proxy or entrepreneurship.43, 44, 45

Another interesting perspective on entrepreneurship is how taxes a ect the growth o small businesses. Robert Carroll,Douglas Holtz-Eakin, Mark Rider, and Harvey Rosencompleted a number o studies on this particular question.A 2000 paper examined how personal income tax ratesin uenced entrepreneurial decisions to hire labor.46 Tey

ound personal income taxes signi cantly in uenced theprobability o entrepreneurial hiring.47 A subsequent paper by the same authors, using similar data,

ound that lower marginal tax rates stimulated business growth among sole proprietors.48

A large body o research considers the impact o capital gains taxes49 on entrepreneurship. Animportant study by James Poterba in 1989 provided a ramework or thinking about the impact o capital gains taxes on entrepreneurship.50 Poterba explained that potential entrepreneurs comparedthe bene ts (compensation) available rom employment at existing companies against the likely payo rom a start-up company. Poterba also explained that a proportionally large share o the payo or compensation or the entrepreneur would come in the orm o a capital gain.51 Tus, a reductionin the capital gains tax increases the value o the payo and there ore increases the pro tability o undertaking entrepreneurial endeavors.

A reduction in the capital gainstax increases the value o thepayo and there ore increasesthe pro tability o undertaking

entrepreneurial endeavors.

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Paul Gompers and Josh Lerner built on this ramework and provided empirical evidence based on venture capital unding.52 Tey analyzed the amount o venture capital and compared it to tax rateson capital gains rom 1972 to 1994. Tey concluded that a 1-percentage-point increase in the capitalgains tax rate resulted in a 3.8 percent reduction in venture capital unding.

Christian Keuschnigg and Sren Bo Nielsen extended the Gompers and Lerner analysis to look atthe e ect o taxes as well as other public policies on the creation and success o small businesses that were nanced by venture capital.53 Critically, they concluded that even a small capital gains tax . . .diminishes incentives to provide entrepreneurial e ort (p. 1033).

Marco Da Rin, Giovanna Nicodano, and Alessandro Sembenelli analyzed a host o governmentpolicies to determine their e ect on business start-ups.54 Teir paper relies on data rom 14 Europeancountries between 1988 and 2001. Tey conclude that a reduction in the capital gains tax resulted inan increase in the proportion o high-tech and early-stage ventures, which they used as a proxy orentrepreneurial activity.55

Te implications o this body o research are that taxes can in uenceo ten to a great degreepeoples decisions regarding work e ort, work participation, education, savings, investment,entrepreneurship, and business development. Tese insights will guide us in evaluating tax systemsacross the 50 states, and in suggesting re orm or Cali ornia.

2. Tax Structure: Di erent Taxes Impose Di erent Costs

ax structure or tax design re ers to the mix o taxes governments use to raise the revenuesnecessary to nance government operations. Te tax structure, in other words, relates to how much o each type o tax is used to raise revenues. Te design is a critical consideration, since some taxes (oncapital) are more damaging to the economy than others (on goods and services).56

As noted, taxes impose signi cant costs on society by distorting the behavior o individuals, amilies,and businesses.57 Individuals and rms make decisions based on prices. Raise the price o a good,and consumers are likely to purchase less o it, or turn to substitute goods. Similarly, raise the priceo an input or business, and it will search or ways to compensate or the increased costs throughsubstitution and innovation. axes change the relative prices o goods, services, and inputs by makingsome inputs more expensive and others relatively less expensive.

Tis distorts production decisionswhat rms produce, and how, where, and when they produce it. axes can also reduce the net return that workers get rom working or taking advanced training oreducation and the net returns that investors get rom employing their capital in one industry ratherthan another.

For example, an increase in an employer payroll tax means that labor, at least in the short term,58 hasbecome more expensive. Labor-intensive rms, in particular, will now ace higher costs and there ore

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look or ways to mitigate the increased expense through the substitution o capital, in the orm o machinery and equipment, or labor.

axes on savings, such as personal income taxes on interest,dividends, and capital gains, and taxes on capital, such as corporate

income taxes, reduce the a ter-tax rate o return received by investors, reducing the incentive to save and invest.59 Tis can haveimportant, and indeed pro ound, e ects on productivity-enhancinginvestment, and ultimately on workers wage rates.60

Personal income taxes a ect labor supply incentives by decreasing a ter-tax wages, thereby a ecting the total number o hours worked and the overall e ort o workers. Finally, sales taxesalso a ect the incentive to work, because they reduce a workers real wage rate by increasing theprices o consumer goods.61 In addition, sales taxes levied on the inputs purchased by rms (acommon eature o state sales taxes) drive up businesses costs and reduce their competitiveness.

Its clear that taxes distort decisions regarding labor, savings, investment, and entrepreneurship. Tese distortions can impose costs on society by leading to a mix o outputs that is less valued thanother combinations that would have emerged under di erent tax systems.62 Te U.S. GovernmentAccountability Ofce (GAO) summarized efciency costs as ollows:

. . . efciency costs occur when tax rules cause individuals to change their work,savings, consumption, and investment behavior in ways that ultimately leave them with a combination o consumption and leisure (now and in the uture) that they value less than the combination they would have obtained under a tax system that didnot distort their behavior.63

A number o studies have investigated the overall or aggregate e ect o tax structure on economicgrowth.64 For example, Richard Kneller, Michael Bleaney, and Norman Gemmell examined data

or 22 OECD countries rom 1970 to 1995.65 Tey ound that taxes on income, pro ts, payroll, andproperty, as well as social security taxes, reduced economic growth. Tey also ound that value-addedor consumption taxes assessed on goods and services did not negatively a ect economic growth. Tey calculated that reducing the use o the more costly taxes by 1 percent o GDP would increaseeconomic growth by between 0.1 and 0.2 percent annually.

Frida Widmalm corroborated these ndings in a 2001 study examining taxation and its e ect oneconomic growth.66 She relied on data or 23 OECD countries or the period 1965 to 1990. She

ound that certain tax mixes did indeed have negative e ects on economic growth. In addition, sheound a negative relationship between economic growth and the share o total taxes levied on personal

income.

Sales taxes also a ect the

incentive to work, becausethey reduce a workers realwage rate by increasing theprices o consumer goods.

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Tese studies all relate to the core observation that some taxes impose greater costs on society than other taxes. Te implication is that two jurisdictions with the same tax burden can experiencedi erent tax-based costs i their mix o taxes is sufciently di erent. o repeat, what matters is not just how much revenue the government raises, but the way in which it does so. Te ollowing sectionsummarizes the research concerning what is re erred to as marginal efciency cost o taxes.

Marginal E fciency Cost o Taxes: Not All Taxes Are Equal

Numerous studies have estimated the economic cost o di erent types o taxes. A critical contributionto this eld was by Nobel laureate James Mirrlees, who in the early 1970s developed the theory o optimal taxation.67 Te core o Mirrleess watershed work was that governments should achieve givenrevenue requirements by choosing taxes that have the best social wel are outcome.

Te research summarized in this section relies on what is re erred to as marginal efciency cost(MEC) or marginal excess burden (MEB) calculations. Te MEC methodology provides amechanism by which to estimate the costs o di erent taxes. Speci cally, the MEC calculates theefciency cost o raising one additional dollar o revenue.68 Te ollowing section highlights a numbero key studies on the efciency costs o taxes or the United States.69

Among the most widely cited calculations o marginal efciency costs are those estimated by Harvardpro essor Dale Jorgenson and his colleague Kun-Young Yun.70 Capital-based taxes (MEC = $0.92)and corporate income taxes (MEC = $0.84) were shown to impose much higher costs than other,more efcient types o taxes such as sales tax (MEC = $0.26).71 Please note that these efciency costsare in addition to the direct cost o extracting an additional dollar o resources rom the economy.In other words, to raise an additional dollar o revenue or the government using corporate incometaxes, society incurs the direct cost o the $1 extracted rom the economy plus an additional $0.84 inefciency costs.

Table 1: Estimates o Marginal E fciency Costs or Selected U.S. Taxes

Type o Tax MECCapital Income Tax (Individual & Corporate) $0.924Corporate Income Tax $0.838individual Income Tax $0.598Labor Income Tax $0.482

All Taxes $0.Sales Tax $0.256Property Tax $0.174

Source: Jorgenson and Yun (1991)

Another important study that calculated the costs o di erent taxes was completed by CharlesBallard, John Shoven, and John Whalley in 1985 and published in the prestigious American Economic Review.72 Te study reported MEC estimates or a broad range o taxes in the United States (table2). Te authors calculated that each dollar o additional tax revenue imposed costs in the range o

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17 to 56 cents on the U.S. economy. As observed in the previous studies, however, there were across-the-board di erences in the costs or di erent taxes. Te authors ound that the efciency costs o sales taxes73 were signi cantly lower ($0.035) than those o other taxes, such as capital taxes ($0.181),income taxes ($0.163), and payroll taxes ($0.121).

Table 2: Marginal Excess Burden rom Raising Extra Revenue rom SpecifcPortions o the Tax System

Type o Tax MECCapital Taxes at Industry Level $0.181

All Taxes $0.170Income Taxes $0.163Labor Taxes at Industry Level $0.121Sales Taxes on Commodities $0.035

Source: Ballard et al. (1985), page 136Note: The original table provided our cost estimates. We have presented only what the authors deemed to be the mostconservative cost estimates. The above table, there ore, is only a partial presentation o the complete table ound in the study.

Harvard economist Martin Feldstein recently summarized the incentive e ects o raising taxes onlabor and investment.74 Tis surprisingly accessible paper, Te E ect o axes on Efciency andGrowth, explains how increasing marginal tax rates negatively a ects economic behavior. Feldsteinarrives at two conclusions based on an analysis o the e ects o increasing marginal rates o personalincome taxes by 1 percent. First, the actual revenue collected is only 57 percent o the static estimate(which ignores incentive e ects). More important, Feldstein calculates the total deadweight lossemanating rom an across-the-board tax increase at $0.76. In other words, it would cost $1.76 to

nance $1.00 in government spending by increasing personal income tax rates across the board.

Te speci c cost estimates o di erent taxes includedin each o the studies noted is less important than theconsistent general nding that the costs (speci cally themarginal efciency costs) o sales (consumption) andpayroll (wage and salary) taxes are much less (i.e., moreefcient) than taxes on capital. As a result, economic gainscan be achieved rom simply shi ting the tax mix away

rom capital-based taxes to more efcient taxes such asthose based on consumption.75

The speci c cost estimates odi erent taxes included in each othe studies noted is less importantthan the consistent general nding

that the costs (speci cally themarginal e ciency costs).

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3. Conclusion and Implications o Tax Research

Te research on all the subjects we have reviewed points to a set o guidelines or taxation. (1) axesshould be assessed on the broadest base possible with an accordingly low rate rather than narrowingthe base through deductions and credits and using an accordingly higher rate. (2) Tere are realeconomic costs to a progressive tax system with increasing marginal tax rates. (3) Te sensitivity o behavior in response to investment-oriented taxes appears to be much greater than with other taxes.(4) Te costs imposed on society through the use o inefcient taxes such as capital-based and income

taxes are materially greater than the costs imposed by other, moreefcient measures, such as consumption and payroll taxes.

Policy makers, o course, must con ront many political and moralconsiderations when implementing real-world tax re orm. Yetthe academic literature provides clear guidance as ar as the basiceconomics are concerned: I the objective is to raise a given amounto revenue while minimizing the negative e ects on per capita

income, employment, and economic growth, policy makers should aim or a broad-based, at (oratter) tax code with low marginal rates. Moreover, these taxes should be applied to consumption as

opposed to income and certainly as opposed to income rom capital.

These taxes should beapplied to consumption as

opposed to income andcertainly as opposed to

income rom capital.

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II. Measuring the Burden o Government

In this section we rank the 50 states according to the aggregate burden o taxation that each imposeson its residents. We ocus on the share o each states economy diverted to government, both state andlocal. In other words, were interested in measuring and ranking the burden or size o government ineach state.

Tere are a number o ways to measure the burden o government. Most studies measure the taxburden, or perhaps the total amount o revenues collected by a government. Tese tax or revenueburdens are then compared to the amount o economic activity in the jurisdiction in order to calculatethe size o the government compared to the size o the economy.

We have chosen a di erent approach. Speci cally, we compute state and local government spending asa share o the state economy (the Gross State Product [GSP]) or the most recent year or which all

relevant data are available (2007). Our approach di ers rom the standard method in two ways.

First, we measure spending rather than revenues. We believe governmentspending is a more accurate measure o the size o government thanalternative measures such as tax receipts. Te main reason or this isborrowing. I governments use debt (de erred taxes) to nance currentspending, then measures o revenues will underestimate the size andperhaps the scope o the government in question. Te nature o thereallocation rom the private sector to the government sector remains thesame whether the spending is nanced through revenues or borrowing.

Because state and local governments cannot simply resort to printingmoney like the ederal government, in the long run they must nance allspending by taxing citizens in one way or another. I government spending exceeds tax receipts in agiven year, that implies higher uture taxes to nance interest payments or to retire debt.76

Second, we incorporate local government spending, or two main reasons. One, excluding localspending necessarily biases the results in avor o state governments that have decentralized taxationand/or spending to local governments. I one measures only state-level spending, the analysisoverlooks activity at the local level, which can o ten be substantial. And, two, there is only one set o taxpayers in a state. It is irrelevant to the taxpayers themselves whether the burden o government

is imposed on them rom their state capital or their local municipality. Combining state and localspending allows the study to measure the total burden o government imposed on citizens in any given state.77

I governmentspending exceeds

tax receipts in agiven year, that

implies higher uturetaxes to nance

interest payments orto retire debt.

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A Note on Scoring

We will be ranking the 50 states in a variety o categories. In the current section, we use only stateand local spending as a share o GSP. In the next section, we will have categories or each o the maintaxes (personal income tax, sales tax, property tax, etc.), and we will have separate rankings o the

states or each o several componentswithin each category. For example, we will rank the 50 statesrom lowest to highest in terms o their top personal income tax rate, and we will also rank the 50

states rom lowest to highest in terms o the progressivity o their corporate income tax rates. We willexplain the speci c measures in more detail in the relevant sections below, but or now we want toexplain the method we use to aggregate the individual rankings on the various component measuresinto a composite ranking.

For each category or component the variable o interestsuch as total spending as a share o GSP, orthe top personal income tax rateis rst converted into a score on a scale o 0.0 to 10.0. (Note that inthis paper, since all the components measure undesirable items, we always reverse the measure, suchthat a score o 10.0 is always the best.) By using a cardinal score, rather than a simple ranking, we canmore accurately capture the quantitative di erence in states per ormances on each measure.

In other words, the worst state would always have a cardinal score o 0.0 (or a rank o 50) while thebest state would always have a cardinal score o 10.0 (or a rank o 1). But between those two extremes,our approach di ers rom a simple ranking because it allows clustering. For example, i most stateshad top personal income tax rates very close to one another, while one state had a much higher (orlower) rate, then our approach would assign similar scores to the clustered states, such as scores rom3.4 to 3.8. In contrast, no matter what the dispersion o the variable, in a simple ranking the score would always increase by one unit as we moved rom the worst to the best state. (See the appendix ora numerical example that illustrates our scoring method.)

I only one variable were being measured, the takeaway message rom the two approaches wouldbe equivalent, since in the end we convert rom our own cardinal score back to a ranking. However,because this report relies on several di erent measures o a states tax burden and structure, it isimportant to retain the measure o dispersal be ore the various components are aggregated into asingle score. In this way, i one state is head and shoulders above its peers in a particular category (suchas low corporate income tax rates), it will bene t more in the nal ranking than a state that ranks

rst in some category (such as total spending as a share o GSP), but which has barely eked out that victory ahead o 15 other states all clustered near the top. Tere ore, our scoring approach ultimately yields a simple ranking o the states rom the worst at number 50 to the best at number 1but thecardinal scores o 0.0 to 10.0 in the intermediate steps allow or a more accurate weighting o thestates per ormances on various measures.

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Observations

South Dakota was the top-ranked state in this category (see table 3 and gure 1), with state andlocal spending representing 11.6 percent o GSP in 2007. Delaware ranked second, with state andlocal spending accounting or 12.0 percent o GSP. Te other states in the top ve were: exas (12.1percent), Louisiana (12.2 percent), and New Hampshire (13.2 percent).

At the other end o the spectrum, Alaska ranked 50th, with state and local government spendingrepresenting a little more than one- th (20.2 percent) o the states economy.78 South Carolinaranked 49th, with 19.4 percent o its economy consumed by state and local government spending.

wo o the largest states, Cali ornia and New York, came next. New York ranked 48th, with 18.4percent o the state economy consumed by state and local government spending, while Cali orniaranked 47th (18.3 percent). New Mexico rounded out the list o lowest-ranked states; it came in 46th, with state and local governments consuming 17.9 percent o GSP.

Figure 1: State and Local Spending as Share of GSP (2007)

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

AlaskaSouth Carolina

New YorkCalifornia

New MexicoOhio

VermontMichigan

NebraskaWashington

MaineMississippi

AlabamaRhode Island

WisconsinFlorida

PennsylvaniaOregon

KentuckyTennessee

New JerseyHawaii

West VirginiaMinnesota

Montana Arizona

UtahIndiana

Wyoming Arkansas

GeorgiaIdaho

MassachusettsKansas

IowaMaryland

OklahomaIllinois

ColoradoMissouri

North CarolinaNevada

North DakotaConnecticut

VirginiaNew Hampshire

LouisianaTexas

DelawareSouth Dakota

Percentage of GSP

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Table 3: Burden o Government

StateState and Local Government Spending

as a Percentage o GSP (2007)Score

(Out o 10) Rank Alabama 16.9% 3.8 38 Alaska* 20.2% 0.0 50

Arizona 15.6% 5.4 25 Arkansas 15.2% 5.8 21Cali ornia 18.3% 2.2 47Colorado 14.7% 6.4 12Connecticut 13.4% 7.9 7Delaware 12.0% 9.6 2Florida 16.8% 4.0 35Georgia 15.2% 5.9 20Hawaii 15.9% 5.1 29Idaho 15.1% 5.9 19Illinois 14.7% 6.4 13Indiana 15.3% 5.7 23Iowa 15.0% 6.1 16

Kansas 15.1% 6.0 17Kentucky 16.3% 4.6 32Louisiana 12.2% 9.3 4Maine 17.1% 3.6 40Maryland 14.9% 6.2 15Massachusetts 15.1% 6.0 18Michigan 17.5% 3.2 43Minnesota 15.7% 5.3 27Mississippi 17.1% 3.7 39Missouri 14.5% 6.7 11Montana 15.6% 5.3 26Nebraska 17.4% 3.3 42Nevada 13.5% 7.8 9New Hampshire 13.2% 8.2 5New Jersey 16.2% 4.7 30New Mexico 17.9% 2.6 46New York 18.4% 2.1 48North Carolina 13.7% 7.6 10North Dakota 13.4% 7.9 8Ohio 17.6% 3.0 45Oklahoma 14.8% 6.3 14Oregon 16.7% 4.1 33Pennsylvania 16.8% 4.0 34Rhode Island 16.9% 3.9 37South Carolina 19.4% 1.0 49

South Dakota 11.6% 10.0 1Tennessee 16.2% 4.6 31Texas 12.1% 9.4 3Utah 15.6% 5.4 24Vermont 17.5% 3.1 44Virginia 13.4% 8.0 6Washington 17.2% 3.5 41West Virginia 15.8% 5.1 28Wisconsin 16.8% 4.0 36Wyoming 15.3% 5.7 22

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Census Bureau. http://www.census.gov/govs/estimate/index.htmlState & Local Government Finance Data Query System. http://www.taxpolicycenter.org/sl -dqs/pages.c m. The Urban Institute and Brookings Institution Tax Policy Center. Data rom U.S. Census Bureau, Annual Survey o State andLocal Government Finances, Government Finances, Volume 4, and Census o Governments (Years).Date o Access: (28-May-09 03:27 PM)

Bureau o Economic Analysis, U.S. Department o Commerce, http://www.bea.gov/regional/gsp/* See ootnote 78 or an explanation o the uniqueness associated with the State o Alaska.

A di erent way to think about the data in table 3 and gure 1, along with the discussion above, is theextent to which state and local governments are active allocators o resources in their jurisdictionseconomies. Te larger the share o the state economy consumed by state and local governmentspending, the larger the in uence and e ect o state and local politics on the state economy. Stateslike South Dakota, Delaware, and exas haveminimized the in uence and thus the burden o their state and local governments relative to theireconomies. On the other hand, states like Alaska,South Carolina, New York, and un ortunately Cali ornia, have not restrained their state and localgovernments, which play a much larger role in their economies. Besides the important philosophicalissues concerning the proper size o government, large public sectors are problematic because thepolitical process tends to allocate resources less efciently than competitive markets.79

States like Alaska, South Carolina,

New York, and un ortunately Cali ornia,have not restrained their state and localgovernments, which play a much larger

role in their economies.

Sources or Table 3 and Figure 1

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III. Measuring Tax Structures

In the previous section, we ranked the 50 states on a single measure o state and local spending as ashare o the states economy. But as the scholarly research shows, it is a question not merely o theamount o resources extracted by the government, but also o howthose resources are obtained.

In this section, we rank the 50 states based on the structure o ve major taxespersonal income tax,corporate income tax, capital-based taxes, sales tax, and property tax. Te ranking on the property taxconsists o a single measure, while the other categories consist o two or more measures, combined togenerate a composite ranking.

For example, to generate our overall ranking in the category o personal income tax, we look at threecomponents: (a) top tax rate, (b) progressivity, and (c) e ective rate (total receipts as a raction o statepersonal income). For each o these components, we assign the states a score rom 0.0 to 10.0 (as

described in the appendix). Ten we take the equally weighted average o these three scores in order tocalculate each states overall score or the category o personal income tax.

In the ollowing subsections we will highlight the major ndings within each category, and alsomention some o the caveats that inevitably pertain to an aggregate ranking scheme such as this one.

1. Personal Income Tax

Personal income taxes are a major source o revenue or most states. On average, states derive more

than 10 percent o their total (non- ederal) revenues rom personal income taxes at all levels, andeight states derive more than 15 percent o their total revenues rom this single source. Te personalincome tax is also one o the more visible and well understood taxes or the average citizen. As noted,it also widely a ects behavior. Workers, entrepreneurs, and even corporate shareholders are a ectedby personal income taxes, and adjust their behavior accordingly. For example, the higher the marginalincome tax rate a worker, investor, or entrepreneur aces, the less incentive he has to work overtime

( or workers), to start a new business ( or entrepreneurs), or toinvest in an established or new venture ( or shareholders). Tesebehavioral responses have real e ects on the economy throughless work, less entrepreneurship, and less investment.

For the personal income tax, as well as the corporate income taxand capital-based taxes, we examine three separate componentsto gauge the overall structure o a states tax system. Te rst

component is the top tax rate, meaning the tax rate applicable in the highest tax bracket.80 Te secondcomponent is progressivity, which we measure by subtracting the lowest tax rate rom the highesttax rate.81 Te third component is the total receipts rom a given tax, divided by the pool o income

The best design o a personalincome tax system would beone characterized by a single

rate with limited deductionsand tax credits.

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rom which the tax is extracted. For the personal income tax, we compared total personal income taxreceipts (state and local) with total state personal income to measure the raction o (pre-tax) incomethe state and local governments diverted rom individuals.

As with all o our measures, a state will achieve a higher score thelower its computed variable on a

given component in the personal income tax category. For example, states that have no income tax oran income tax with only one bracket will receive a score o 10.0 on the progressivity component.82

Each o the three measures examines the design o a states personal income tax system in a di erent way. Te rst measure, the top personal income tax rate, simply records how high the personal incometax rates in each state reach. Te second measure, progressivity, assesses how aggressively the stateincreases personal income tax rates as individuals earn more income. Te nal measure, personalincome taxes as a share o personal income, measures the total burden o the personal income taxon the incomes o a states citizens. In each case, our measures attempt to determine, based on pastresearch o taxation, how best to design a personal income tax system.

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Table 4: Personal Income TaxesState Data Scores and Rankings

TopStatutory

Rate

BottomStatutory

Rate

Progressivity(Percentage

Points)EffectiveRate(1)

TopStatutory

Rate: Score

TopStatutory

Rate: Rank Alabama 5.00% 2.00% 3.00% 2.04% 5.5 18 Alaska 0.00% 0.00% 0.00% 0.00% 10.0 1 Arizona 4.54% 2.59% 1.95% 1.80% 5.9 14 Arkansas 7.00% 1.00% 6.00% 2.54% 3.6 36California 10.55% 1.25% 9.30% 3.51% 0.4 47

Colorado 4.63% 4.63% 0.00% 2.40% 5.8 15Connecticut 5.00% 3.00% 2.00% 3.30% 5.5 18Delaware 6.95% 2.20% 4.75% 3.10% 3.7 35Florida 0.00% 0.00% 0.00% 0.00% 10.0 1Georgia 6.00% 1.00% 5.00% 2.76% 4.5 26Hawaii 11.00% 1.40% 9.60% 3.11% 0.0 49Idaho 7.80% 1.60% 6.20% 2.96% 2.9 40Illinois 3.00% 3.00% 0.00% 1.79% 7.3 10Indiana 3.40% 3.40% 0.00% 2.48% 6.9 12

Iowa 8.98% 0.36% 8.62% 2.63% 1.8 44Kansas 6.45% 3.50% 2.95% 2.71% 4.1 31Kentucky 6.00% 2.00% 4.00% 3.10% 4.5 26Louisiana 6.00% 2.00% 4.00% 2.09% 4.5 26Maine 8.50% 2.00% 6.50% 3.04% 2.3 42Maryland 6.25% 2.00% 4.25% 4.11% 4.3 30Massachusetts 5.30% 5.30% 0.00% 3.60% 5.2 22Michigan 4.35% 4.35% 0.00% 2.00% 6.0 13Minnesota 7.85% 5.35% 2.50% 3.39% 2.9 41Mississippi 5.00% 3.00% 2.00% 1.68% 5.5 18Missouri 6.00% 1.50% 4.50% 2.59% 4.5 26Montana 6.90% 1.00% 5.90% 2.62% 3.7 34Nebraska 6.84% 2.56% 4.28% 2.57% 3.8 33

Nevada 0.00% 0.00% 0.00% 0.00% 10.0 1New Hampshire(3) 0.98% 0.98% 0.00% 0.20% 9.1 9New Jersey 10.75% 1.40% 9.35% 2.74% 0.2 48New Mexico 4.90% 1.70% 3.20% 1.95% 5.5 17New York 8.97% 4.00% 4.97% 4.74% 1.8 43North Carolina 7.75% 6.00% 1.75% 3.47% 3.0 38North Dakota 4.86% 1.84% 3.02% 1.38% 5.6 16Ohio 5.93% 0.59% 5.34% 3.47% 4.6 25Oklahoma 5.50% 0.50% 5.00% 2.20% 5.0 23Oregon 11.00% 5.00% 6.00% 4.27% 0.0 49Pennsylvania 3.07% 3.07% 0.00% 2.76% 7.2 11Rhode Island 9.90% 3.75% 6.15% 2.59% 1.0 46South Carolina 7.00% 0.00% 7.00% 2.36% 3.6 36South Dakota 0.00% 0.00% 0.00% 0.00% 10.0 1Tennessee(3) 0.97% 0.97% 0.00% 0.12% 9.1 8Texas 0.00% 0.00% 0.00% 0.00% 10.0 1Utah 5.00% 5.00% 0.00% 3.22% 5.5 18

Vermont 9.40% 3.55% 5.85% 2.50% 1.5 45 Virginia 5.75% 2.00% 3.75% 3.19% 4.8 24Washington 0.00% 0.00% 0.00% 0.00% 10.0 1West Virginia 6.50% 3.00% 3.50% 2.56% 4.1 32

Wisconsin 7.75% 4.60% 3.15% 3.12% 3.0 38Wyoming 0.00% 0.00% 0.00% 0.00% 10.0 1

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Scores and Rankings Overall

Progressivity:Score

Progressivity:Rank

Effective Rate:Score

Effective Rate:Rank

OverallScore(2)

OverallRank

6.9 23 5.7 16 6.0 2010.0 1 10.0 1 10.0 18.0 18 6.2 13 6.7 153.8 41 4.6 23 4.0 370.3 48 2.6 46 1.1 50

10.0 1 4.9 20 6.9 147.9 19 3.0 42 5.5 225.1 34 3.4 37 4.1 35

10.0 1 10.0 1 10.0 14.8 36 4.2 32 4.5 320.0 50 3.4 38 1.1 493.5 44 3.8 34 3.4 41

10.0 1 6.2 12 7.8 1010.0 1 4.8 21 7.2 12

1.0 47 4.4 29 2.4 456.9 22 4.3 30 5.1 245.8 29 3.5 36 4.6 305.8 29 5.6 17 5.3 233.2 45 3.6 35 3.0 445.6 31 1.3 48 3.7 40

10.0 1 2.4 47 5.9 2110.0 1 5.8 15 7.3 117.4 21 2.8 43 4.4 337.9 19 6.4 11 6.6 165.3 33 4.5 27 4.8 273.9 40 4.5 28 4.0 365.5 32 4.6 25 4.6 29

10.0 1 10.0 1 10.0 110.0 1 9.6 9 9.6 90.3 49 4.2 31 1.6 486.7 26 5.9 14 6.0 194.8 35 0.0 50 2.2 468.2 17 2.7 44 4.6 316.9 24 7.1 10 6.5 174.4 38 2.7 45 3.9 384.8 37 5.4 18 5.1 253.8 41 1.0 49 1.6 47

10.0 1 4.2 33 7.1 133.6 43 4.5 26 3.0 432.7 46 5.0 19 3.8 39

10.0 1 10.0 1 10.0 110.0 1 9.7 8 9.6 810.0 1 10.0 1 10.0 110.0 1 3.2 41 6.2 183.9 39 4.7 22 3.4 426.1 28 3.3 40 4.7 28

10.0 1 10.0 1 10.0 16.4 27 4.6 24 5.0 26

6.7 25 3.4 39 4.4 3410.0 1 10.0 1 10.0 1

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Observations

(a) op Personal Income ax Rate

Seven states (Alaska, Florida, Nevada, South Dakota, exas, Washington, and Wyoming) tie or thetop position on this measure, because they dont impose any personal income taxes, and thus the toprate is 0 percent. Te top-ranked states among those that have personal income taxes are ennesseeand New Hampshire, which assess their income taxes only on dividends and capital gains.84 Illinois,coming in 10th overall, ranks highest or this measure among those states that impose a broad-basedpersonal income tax.

Hawaii and Oregon rank last on this measure, both with a top personal income tax rate o 11.0percent. Cali ornia ranked 47th, with a top personal income tax rate o 10.55 percent.

(b) Progressivity o Personal Income ax Rates

Sixteen states tied or the top position on the measure o progressivity or personal income taxes.Speci cally, these were the seven states that do not impose personal income taxes, plus nine states(Colorado, Illinois, Indiana, Massachusetts, Michigan, New Hampshire, Pennsylvania, ennessee, andUtah) that impose a at-rate personal income tax.

Hawaii ranked last on progressivity. Cali ornia ranked 48th, outper orming only Hawaii and New Jersey. In other words, these three states, along with several others that trail them only narrowly,increase the personal income tax rates imposed on citizens as their income increases to a much greaterdegree than the other states.

Notes and Sources or Table 4 and Figure 2

NOTES:1 - Re ers to the ratio o state and local personal income tax revenues or the most recent year available (2007) as a shareo personal income. It is a measure o the total burden o personal income taxes relative to the base upon which they areassessed: personal income.

2 - Each o the three measures (top statutory rate, progressivity, and e ective rate) are equally weighted to arrive at thecomposite or overall score.3 - Note that Tennessee and New Hampshires statutory rates have been adjusted downward because their personal incometaxes only apply to dividend and interest income. Full explanation in the text.

SOURCES: Tax Foundation, http://tax oundation.org/taxdata/show/228.html#state_ind_income_rates-20090710State & Local Government Finance Data Query System. http://www.taxpolicycenter.org/sl -dqs/pages.c m. The Urban Institute and Brookings Institution Tax Policy Center. Data rom U.S. Census Bureau, Annual Survey o Stateand Local Government Finances, Government Finances, Volume 4, and Census o Governments (Years).Date o Access: (28-May-09)Census Bureau. http://www.census.gov/govs/estimate/index.htmlRegional Economic In ormation System. http://www.bea.gov/regional/spi/de ault.c m?selTable=summary. Bureau o Economic Analysis. Date o Access: (4-June-09)Calculations by the authors.

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(c) Personal Income ax Receipts as a Share o Personal Income

As with the top personal income tax rate, the seven states with no personal income taxes rankedhighest, ollowed by New Hampshire and ennessee, which impose only a limited personal incometax. North Dakota ranked 10th on this measure but highest

among the states that impose a broad-based personal incometax. Speci cally, North Dakota extracted 1.4 percent o itscitizens personal income through personal income taxes.

New York ranked last on this measure, with 4.7 percent o personal income in the state extracted through personal incometaxes, which is more than three times the percentage NorthDakota extracts. Cali ornia ranked 46th on this measure, with a high amount o personal income (3.5percent) extracted through personal income taxes compared to other states.

Overall

Not surprising, the seven states that do not impose personal income taxes tied or rst place: Alaska,Florida, Nevada, South Dakota, exas, Washington, and Wyoming. Cali ornias combination o

47th on the top personal income tax rate, 48th on personal income tax progressivity, and 46th on theshare o personal income collected in personal income taxes resulted in an overall ranking o 50th orpersonal income taxes. Indeed, the state received a score o only 1.1 out o a possible 10.0. I policy makers want to understand why the Golden State is lagging behind other states economically, thepunitive and steeply progressive personal income tax code is a good place to start looking.

Cali ornia ranked 46th on thismeasure, with a high amount

o personal income (3.5percent) extracted through

personal income taxescompared to other states.

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Figure 2: Personal Income Tax Scores (0-10)

0.0 2.0 4.0 6.0 8.0 10.0

CaliforniaHawaii

New JerseyOregon

New YorkIowa

MaineRhode Island

VermontIdaho

MarylandSouth Carolina

Ohio Arkansas

MontanaDelaware

WisconsinMinnesota

GeorgiaNorth Carolina

KentuckyNebraska

VirginiaMissouri

West VirginiaOklahoma

KansasLouisiana

ConnecticutMassachuset

AlabamaNew Mexico

UtahNorth Dakota

Mississippi Arizona

ColoradoPennsylvania

IndianaMichigan

IllinoisNew HampshireTennessee

AlaskaFlorida

NevadaSouth Dakota

TexasWashington

Wyoming

Score (0-10)

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2. Corporate Income Tax

Most states levy taxes on corporate income. As noted, corporate-based taxes impose large costson society through the disincentives they create or investment. Nothing is certain in business; acorporation always runs the risk o losing money. As the government takes larger portions romsuccess ul operations, it reduces the likelihood that investors will undertake the risk in the rst place. Te research conclusively demonstrates that high rates o corporate taxation retard investment andeconomic growth.

For the corporate income tax, we rely on three separate measures that mirror those used orthe personal income tax. Speci cally, we look at each states top corporate income tax rate, theprogressivity in the corporate income tax rates, and nally total corporate income tax receipts (stateand local) as a share o gross operating surplus.85

Gross operating surplus is our proxy or total corporate income. Un ortunately, because corporationsthat operate in many jurisdictions report income on a national or worldwide basis, we do not havemeasures o corporate income at the state level. Te Bureau o Economic Analysisdoeshave state-by-state breakdowns o gross operating surplus, however, which it de nes in this way:

Gross operating surplus (GOS) consists o proprietors income with inventory valuation adjustment (IVA) and capital consumption allowances (CCA), and othercorporate capital charges. Other corporate capital charges consist o rental incomeo persons and CCA, corporate pro ts be ore tax with IVA and CCA, net interest,business trans er payments, nontax payments to general government agencies that aretreated like taxes, and the current surplus o government enterprises.86

Just as we measured how much o a states personal income was collected in personal income taxreceipts, we are also interested in how much o a states gross operating surplus is collected incorporate income tax receipts. Gross operating surplus is not the same thing as corporate net income(i.e., corporate pro ts), but it is the closest measure available.

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Table 5: Corporate Income TaxesState Data Scores and Rankings

TopStatutory

Rate

BottomStatutory

Rate

Progressivity(Percentage

Points)E ective

Rate1

TopStatutory

Rate: Score

TopStatutory

Rate: Rank Alabama 6.50% 6.50% 0.00% 0.88% 4.6 19 Alaska 9.40% 1.00% 8.40% 3.95% 2.2 46 Arizona 6.97% 6.97% 0.00% 1.10% 4.2 25 Arkansas 6.50% 1.00% 5.50% 1.04% 4.6 19Cali ornia 8.84% 8.84% 0.00% 1.66% 2.6 42Colorado 4.63% 4.63% 0.00% 0.56% 6.1 7Connecticut 7.50% 7.50% 0.00% 1.10% 3.8 29Delaware 8.70% 8.70% 0.00% 0.91% 2.8 41Florida 5.50% 5.50% 0.00% 0.93% 5.4 12Georgia 6.00% 6.00% 0.00% 0.72% 5.0 13Hawaii 6.40% 4.40% 2.00% 0.48% 4.7 18Idaho 7.60% 7.60% 0.00% 0.96% 3.7 30Illinois 7.30% 7.30% 0.00% 1.35% 3.9 28Indiana 8.50% 8.50% 0.00% 1.10% 2.9 37Iowa 12.00% 6.00% 6.00% 0.61% 0.0 50Kansas 7.05% 4.00% 3.05% 1.27% 4.1 26Kentucky 6.00% 4.00% 2.00% 2.15% 5.0 13Louisiana 8.00% 4.00% 4.00% 0.77% 3.3 35Maine 8.93% 3.50% 5.43% 1.16% 2.6 43Maryland 8.25% 8.25% 0.00% 0.92% 3.1 36Massachusetts 9.50% 9.50% 0.00% 1.93% 2.1 47Michigan 4.95% 4.95% 0.00% 1.51% 5.9 8Minnesota 9.80% 9.80% 0.00% 1.39% 1.8 48Mississippi 5.00% 3.00% 2.00% 1.20% 5.8 9Missouri 6.25% 6.25% 0.00% 0.51% 4.8 17Montana 6.75% 6.75% 0.00% 1.37% 4.4 23Nebraska 7.81% 5.58% 2.23% 0.67% 3.5 32Nevada 0.00% 0.00% 0.00% 0.00% 10.0 1New Hampshire 8.50% 8.50% 0.00% 3.19% 2.9 37New Jersey 9.00% 6.50% 2.50% 1.89% 2.5 44New Mexico 7.60% 4.80% 2.80% 1.54% 3.7 30New York 7.10% 7.10% 0.00% 3.17% 4.1 27North Carolina 6.90% 6.90% 0.00% 1.01% 4.3 24North Dakota 6.50% 2.60% 3.90% 1.22% 4.6 19Ohio 0.00% 0.00% 0.00% 0.76% 10.0 1Oklahoma 6.00% 6.00% 0.00% 1.04% 5.0 13Oregon 7.90% 6.60% 1.30% 0.73% 3.4 33Pennsylvania 9.99% 9.99% 0.00% 1.24% 1.7 49Rhode Island 9.00% 9.00% 0.00% 1.06% 2.5 44South Carolina 5.00% 5.00% 0.00% 0.62% 5.8 9

South Dakota 0.00% 0.00% 0.00% 0.47% 10.0 1Tennessee 6.50% 6.50% 0.00% 1.28% 4.6 19Texas 0.00% 0.00% 0.00% 0.00% 10.0 1Utah 5.00% 5.00% 0.00% 1.01% 5.8 9Vermont 8.50% 6.00% 2.50% 1.07% 2.9 37Virginia 6.00% 6.00% 0.00% 0.68% 5.0 13Washington 0.00% 0.00% 0.00% 0.00% 10.0 1West Virginia 8.50% 8.

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