In my last post, I showed that high tax rates at the state level, if anything, tend to improve growth as measured by gross state product (GSP). I wondered how debt might intercede in this phenomenon, so I charted change in debt to GSP ratio over a four year period as a function of the 2005 tax to GSP ratio. The result is the opposite of what is expected, and what has generally been observed at the federal level. The results imply that high tax rates correlate with more rapidly increasing debt to GSP ratios (despite the high tax rate states having GSPs that increase more rapidly). However, if the two outlier states, Mississippi and Arkansas (which both had debt/GSP increases more than twice that of any other state), are ignored, then the correlation is reversed. Moreover, the highest tax state (Vermont) experienced less than one third the debt increase than that of the lowest tax state (Texas).
Change in debt is important to consider when comparing the economic policies of the states. Sharp increases in debt may fund short term economic expansion but with negative long term consequences.
The second chart has the two outliers (Mississippi and Arkansas) excluded.
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