Lower Taxes Related to Higher State Credit Ratings?

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.