COVID-19 Job Losses Have Been The Steepest In High-Tax States

By Chuck DeVore of The Texas Public Policy Foundation.

"The state jobs report for June was issued Friday morning with all states and the District of Columbia showing nonfarm payroll increases as the nation continues to recover from the steps taken to slow the spread of COVID-19. The U.S. Bureau of Labor Statistics reported that the national unemployment rate declined by 2.2% to 11.1%, 7.4% higher than in June 2019.

But the economic effects of state and local government measures to “flatten the curve” to prevent the medical system from being overwhelmed varies widely from state-to-state. There are two main variables at work here—when the virus hit a state and how hard, and policymakers’ response to the pandemic.

At one end of the scale, South Dakota and Republican Gov. Kristi Noem resisted calls to lock down the state, deciding that the broader effects of an economic depression would outweigh the potential damage from the virus. The opposite was seen in New York and California, where, in the Empire State’s case, residents suffered the nation’s highest death toll while also enduring the second-steepest decline in private sector employment over the past four months (after Hawaii).

As it turns out, a state’s general fiscal orientation is a strong indicator as to the extent of jobs losses since the virus hit. States with heavy tax burdens generally feature government policies that favor government intervention. States with lighter tax burdens lean towards smaller government with a relatively larger role for individuals, charities, and business.

Looking at 2016 individual federal income tax returns from households that itemize deductions, there are 27 states where the average State and Local Tax (SALT) deduction was under $10,000—the cap under the tax cut signed into law by President Trump in December 2017. These states collectively lost 7.7% of their nonfarm private sector employment from February 2020 to June. In the 23 states with average SALT deductions greater than $10,000, the rate of job losses was 57% greater, 12%.

This disparity in employment performance continues a trend that widened significantly after the Trump tax cut. In the last two years of the Obama presidency, the low-tax states enjoyed a modest job creation advantage, generating private sector jobs at a 15% greater annualized rate (2.0%) than did the high-tax states (1.7%). In President Trump’s first year, this advantage widened to 41%, (2.0% to 1.4%), as manufacturing jobs expanded in reaction to the lighter regulatory burden. After the 2017 tax cut amplified the low-tax states’ advantage, private sector job growth diverged significantly. Low-tax states added private sector jobs at a 2.02% annual rate in the 25 months from January 2018 until the virus began to affect in the economy in February 2020 compared to 1.03% in the high-tax states, a 96% advantage.

Over President Trump’s entire term so far, the 27 low-tax states have almost returned to their January 2020 private sector payroll levels, with nonfarm private sector employment 1.8% lower in June 2020. In the high-tax states, job losses since January 2020 are 8.9%, 388% larger.

A few states stand out in their performance over the past 40 months. Among the low-tax states, Arizona, Idaho, Texas, and Utah still managed to produce private sector job growth since January 2017 despite the virus. None of the high-tax states showed job gains since January 2017, with eight states showing double digit job losses since January 2017: Connecticut, Hawaii, Massachusetts, Michigan, New Jersey, New York, Rhode Island, and Vermont.

There’s an interesting political connection to state tax burdens. Out of the 27 low-tax states, all but five voted for Trump in 2016: Colorado, Delaware, Nevada, New Mexico, and Washington. Out of the 23 high-tax states, eight voted for Trump: Iowa, Kentucky, Michigan, Missouri, Nebraska, Ohio, Pennsylvania, and Wisconsin—though all of these states have below average individual tax burdens for the high-tax state grouping.

As the nation recovers from the COVID-19 pandemic, look for the low-tax states to lead the way in job creation."