Fed Study: States with Low Welfare Growth, Simple Tax Rates Grow Faster

States with simpler tax codes and lower welfare payments have stronger wage and employment growth than other states in the union, research published Tuesday by the U.S. Federal Reserve Bank of San Francisco showed.

The findings, published in the San Francisco Fed's latest Economic Letter, suggest that state policymakers can goose economic and job growth by fostering a better business climate as measured by taxes and other costs.

"Corporate tax simplicity and uniformity with federal taxation are associated with stronger wage and gross state product growth," wrote David Neumark, a University of California, Irvine, economics professor and visiting scholar at the regional Fed bank. "States with higher welfare and transfer payments show weaker employment and wage growth."

But the research, co-authored by Trulia Inc chief economist Jed Kolko and Public Policy Institute of California policy associate Marisol Cuellar Mejia, also showed that conditions over which policymakers have little control — like mild weather and low population density — are even more closely tied to economic growth than tax policy.

The findings help explain some of the differences in state growth.

Texas, which had some of the strongest job growth during and since the Great Recession, scores highly both on indexes measuring business climate as well as nonpolicy factors. Tennessee and Alabama — where job growth has lagged that of Texas — have favorable business climates but rank low in terms of nonpolicy factors, the study said.

California, the study said, ranks among the worst in terms of taxes and other business costs, but is among the strongest in nonpolicy growth factors.

Some policies that could hurt growth, like high welfare payments, could have other benefits, like equity, the researchers said.

"Growth is not the only criterion for evaluating a state's economic performance," the researchers said. "Still, economic growth can't be ignored since it is the long-run source of the resources that society can use to pursue its other goals."