SEILER: Sales taxes and unemployment are linked

By   /   August 16, 2012  /   1 Comment

By John Seiler | For Watchdog.org

John Seiler

HELENA — As I mentioned in my article Wednesday, Montana is considering imposing a sales tax. The action is being supported by Republican gubernatorial candidate Rick Hill.

Exclusive for Watchdog.org, I have prepared a scatterplot graph that shows sales taxes generally increase unemployment in the 50 states. The correlation isn’t exact, but it is fairly strong. Here’s the graph:

The bottom axis is for the current “State sales tax rate.” I’m using the “general tax rate,” so it doesn’t include added sales taxes from cities, counties and municipalities.

On the left is the “State unemployment rate,” for June 2012, from the U.S. Bureau of Labor Statistics.

The black trend line combines the averages of all the states. As it moves to the right on the “State sales tax rate,” the trend line clearly moves upward, meaning higher state unemployment.

Inside the chart, on the far left, the red diamonds are for states with zero income tax. Montana is the third red diamond from the bottom. The state’s unemployment rate actually is pretty close to that predicted by the trend line, although a little bit higher.

The U.S. overall unemployment rate in June was 8.3 percent. No state with a zero percent sales tax had an unemployment rate higher than that. However, of the five states with zero unemployment, four are above the trend line.

Of the seven states with a sales tax rate of 7 percent or higher — far right of the chart — five had unemployment rates above the 8.3 percent national average. And all seven were higher than the black trend line.

The biggest anomaly was — no surprise — North Dakota. It’s the red diamond at the bottom of the 5 percent sales tax line in the middle, because of its 2.9 percent unemployment rate. A big oil boom will do that for you.

Because the scatterplot chart mixes together all 50 states, it includes states with all mixes of taxes. New Hampshire has no sales or income tax. Montana has an income tax but no sales tax. California has high sales and income taxes. So, the effect of the sales tax is, by this aggregation, given a general projection.

The projection is that, generally, the higher the sales tax, the higher the unemployment rate.

Below I have included the chart of the data I compiled from Wikipedia’s list of the current state sales tax rates and the U.S. Bureau of Labor Statistics’ list of state unemployment rates.

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Dustin Hurst

  • WatchingDog

    This data only proves that there is a mildly strong association, but does not prove causation whatsoever. You should be careful about implying that sales taxes cause higher unemployment, when all this data analysis can tell us is that for some unknown reason states with sales taxes also seem to have higher unemployment, but we do not know if sales taxes actually play a role or if it is merely a coincidental association.