State Taxes and Debt

Chris Edwards

Government legislators pursue spending increases because they believe that spending solves problems in society and benefits their constituents. However, they use methods of fiscal illusion to try to hide the costs of spending. One method is debt. By borrowing, legislators push the costs down the road for future legislators and taxpayers to deal with.

Spendthrift legislators can get away with borrowing more and taxing less in the short run, but in the long run taxes will rise to cover the higher interest costs on the accumulating debt. Relative to state gross domestic product, state and local taxes tend to be higher in states that have higher state and local debt, as shown in the chart below. The tax and debt data are from the Census Bureau for 2021.

The chart includes a fitted regression line showing the strong positive correlation between taxes and debt. Perhaps states that borrow more end up raising taxes to cover the rising interest costs. Or perhaps states that favor higher spending tend to pursue it with both taxes and debt. There are some outliers—Kentucky has high debt and average taxes, whereas Maine and Vermont have high taxes and average debt.

People living in the top‐​right states should be asking questions. Residents of Vermont, Maine, and Hawaii should be asking why their tax burdens are almost twice as high as the burdens in the lowest‐​tax states. And residents of Kentucky, West Virginia, New York, and Hawaii should be asking why their states have racked up debt burdens three or four times higher than the burdens in the lowest‐​debt states. And all of us should be asking why the federal government is vastly more irresponsible with debt than the worst‐​run states.