Lower Taxes Related to Higher State Credit Ratings?

November 02, 2011

Writing in Investors' Business Daily, James Carter and Christine Harbin report some correlations between state bond credit ratings and tax policy:

States with strong credit ratings have a few key traits in common. For one, they tend to keep taxes low.

The average top marginal personal income-tax rate for states boasting the S&P's AAA and AA+ credit ratings (the two highest ratings) is 5.1%. This figure rises to 6.3% for states in the middle-rated group (AA and AA-) and 7.7% in states in the lowest-rated group (A+ and A-).

The average top marginal corporate income-tax rate for states boasting the S&P's AAA and AA+ credit ratings is 6.7%. This figure rises to 7.6% for states in the middle-rated group and 9.2% in states in the lowest-rated group.

The overall state and local tax burden is lowest in the highest-rated group and highest in the lowest-rated group.

State governments with strong credit ratings tend to carry less debt and spend less on debt service. On average, the highest-rated states spend 7.8% of their annual tax revenue on debt service. States in the middle-rated group (AA and AA-) spend 8.4% while those in the lowest-rated group (A+ and A-) spend 9.2%.

Read the full op-ed here.

For our map of state credit ratings earlier this year, see here.

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