Cut Taxes and Reduce Spending to Fight Poverty?

Conventional wisdom is that bleeding-heart liberals care deeply about poverty while conservatives and libertarians would let children and the poor starve in the streets. A new study by Dr. Matthew Ladner and I that was published recently by the Rio Grande Foundation should dispel this notion and add weight to the argument that limited government is a better tool for lifting people out of poverty than bigger government.

Stepping back a bit to take in a broader world view, the case for limited government as a tool for reducing poverty has already been made on a global scale. The Cato Institute, Heritage Foundation, and a handful of other think tanks produce annual indices that clearly show the superior economic performance of nations with relatively limited governments like the United States, New Zealand, and Hong Kong when compared to the unlimited government and relatively impoverished nations of North Korea, Cuba, and Zimbabwe.

Those who support big government offer any array of excuses to justify the large gaps in living standards among free and un-free nations; our study demolishes these arguments by focusing narrowly on the relative performance of the 50 states on the issue of reducing poverty during the 1990s. Thus, it is more difficult to blame the poverty gap on cultural or resource differences.

The numbers are striking and clearly show that taxes and spending have a tremendous impact on poverty, but it is not the necessarily the impact that those who would spend ever more taxpayer money on government poverty programs will like. For starters, we wanted to explore the impact of taxation levels on poverty. So, we chose the 10 highest tax states and compared their performance over the decade to the 10 lowest-tax states. The low-tax states saw a decline in poverty rates more than 9% while poverty rates actually increased in the high tax states by approximately 2%.

Similar results were found when we looked only at childhood poverty. In the high tax states, poverty rates declined by a modest 2.8% while in the low tax states poverty rates dropped by a robust 10.3%. In a similar vein, childhood poverty in low tax states dropped by 9.26% while childhood poverty in high tax states actually rose by 3.4%.

The relative success of low-tax states in reducing poverty is somewhat unsurprising. Sure, less taxation spurs the economy, thus creating jobs and economic growth. But, what about spending? This time the authors compared the 10 states with the lowest per-capita spending during the 1990s with the top 10 states in per capita spending. In the low-spending states, overall poverty rates declined by a robust 8.42% while the big-spenders not only failed to reduce poverty rates, but they actually suffered an increase in poverty rates of 7.6%.

It is worth noting that New Mexico is among the top ten states in spending per capita and it ranks just behind Louisiana and Mississippi with one of the highest poverty levels nationwide. It is also noteworthy that Colorado led the nation in reducing childhood poverty during the 1990s while it had the fourth best record of reducing overall poverty. Colorado’s Taxpayers’ Bill of Rights was enacted in 1992 and implemented in 1993, so there can be no doubt that the law’s tax and spending reductions had a salutary impact on poverty, not the “doom-and-gloom” impact that opponents expected.

New Mexico Gov. Bill Richardson proposed (and received) an 11% budget increase for FY 2008. Not coincidentally, Republicans in New Mexico’s Legislature this year proposed a Constitutional spending limit amendment that is similar in many ways to Colorado’s. The path out of poverty is clear, but will New Mexico take it?

Mr. Gessing is the president of the Rio Grande Foundation, a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Dr. Ladner is vice president for research at the Arizona-based Goldwater Institute and is an adjunct scholar with the Rio Grande Foundation.