One of the great policy debates in economics surrounds the effects of taxation on employment growth. How do levels of taxation – tax burden – and, perhaps even more importantly, changes in tax burden affect rates of economic growth? It is interesting in this regard to look at the past decade. The period from 2002 through 2012 encompasses the beginning of recovery from the dot-com bust of 2000-01, the housing-fueled recovery through 2006-07, the financial collapse, Great Recession of 2008-09 and the long, slow recovery since that has followed. This certainly was a period of tremendous economic upheaval, and thus one where examination of the effects of tax policies might fruitfully be examined.

With regard to the income tax, Maine has made progress. Over the 2002 to 2012 period, state income tax revenue divided by total population increased by 45 percent to $925. In Maine, the increase was only 33 percent. Maine’s “burden” at $1,123 was still higher than the national average, but its slower growth enabled it to drop from 32 percent above the national average in 2002 to 21 percent above the national average in 2012. In terms of growth in income tax revenues per person over the period, Maine ranked 19 of 43 states.

A similar pattern appears when considering income taxes plus state and local property taxes. Maine’s per capita “burden” in 2002 was 35 percent above the national average, but its growth over the period was 27 percent less than the national average. Maine ranked 22nd among the 50 states plus the District of Columbia in growth of the per capita state and local income and property tax burden. We remain above the average, but are less an outlier than we were a decade ago.

The question then becomes, “How did this ‘holding the line’ on tax increases serve us in economic growth?

The answer, at least the provisional answer, seems to be, “Not so well.”

Over the period, Maine’s total employment (wage and salary employment plus proprietor employment) increased 1.4 percent – a fraction of the national increase of 8.8 percent. Maine ranked last among states in employment growth. Only Ohio and Michigan – both with absolute drops in total employment – ranked lower.

With respect to population growth, we fared slightly better with a growth of 2.6 percent over the decade, ranking us 45th among the states plus Washington, D.C.

The overall point here seems obvious – economic prosperity depends on far more than tax rates and tax burdens alone. Taxes are important, but other factors such as quality of the labor force and transportation infrastructure and the quality and availability of education and the health of the entrepreneurial ecosystem are all far more important than taxes alone in moving an economy toward prosperity.

Charles Lawton is chief economist for Planning Decisions Inc. He can be reached at:

clawton@planningdecisions.com