“The effects of state tax policy on economic growth, entrepreneurship, and employment remain controversial,” begins the abstract of a study of state tax policy just released by the Brookings/Urban Institute Tax Policy Center. But that’s only in the same sense that the statement “human activity is responsible for global warming” is kept “controversial” by people who want to keep us buying and burning fossil fuels.
But the report, “The Relationship Between Taxes And Growth at the State Level: New Evidence,” quickly goes on to declare false a central tenet of conservative dogma and policy: that cutting taxes, especially for the wealthy and businesses, invariably leads to economic growth. That’s not true in the real world, the report said. “We find that neither tax revenues nor top income tax rates bear stable relations to economic growth or employment across states and over time,” the authors wrote. “Our results are inconsistent with the view that cuts in top state income tax rates will automatically or necessarily generate growth.”
The authors – William G. Gale, Aaron Krupkin, and Kim Rueben – mention that several states have cut taxes in recent years, “most prominently Kansas,” which has eliminated its top income tax bracket and reduced tax rates in other areas. But the study looks at the results of state tax policies going back to the 1970s for the 48 contiguous states, attempting to correct for flaws and complications in previous studies.
Howard Gleckman explained the background of this study in a post on TaxVox.
To better understand the effects of state taxes on growth, Bill, Aaron, and Kim tried an experiment. They started with a model developed by Bob Reed (then of the University of Oklahoma, now at the University of Canterbury in New Zealand—btw, good choice on his part). Reed wrote a National Tax Journal paper in 2008 called “The Robust Relationship Between Taxes and U.S. State Income Growth” that has become something of a touchstone for backers of state tax cuts. By using a series of five-year observations from 1970 to 1999, Reed found that increasing tax state revenues correlate to slowing economic growth.
The TPC authors first redid Reed’s analysis for 1977-2001, but then made several adjustments. They added two more observations for each state—for 2006 and 2011–which covered a period of strong economic growth and the Great Recession. They also looked more closely at what was going on inside the time period, broke down revenue changes by different kinds of taxes, and adjusted state tax rates for federal deductibility of state taxes. Finally, they looked at the effects of all these tax changes on business creation and employment.
And they found…a muddle.
Claims made in the 1980s and 1990s that high tax rates deterred the creation of new businesses did not hold up over time, the study found. Sometimes new start-ups increased when taxes increased. High taxes only seem to barely correlate to lower levels of job creation, if at all.
Gleckman concludes that “As policy analysis, this paper tells an important story: The effects of state taxes on economic growth are ambiguous at best.”
Not so ambiguous, though, is the real-world fiscal disasters now unfolding in some states being run by die-hard practitioners of what used to be called “voodoo economics.”
After hard-core conservative Gov. Sam Brownback and the Republican legislature pushed through a series of largely top-end tax cuts, the state is currently facing a $422 million budget deficit “that has some lawmakers questioning the wisdom of the expansive business tax cuts enacted three years ago,” writes the Kansas City Business Journal. The deficit, which is projected to widen to $800 million by the next fiscal year, July 1, is forcing state public schools to close early, Bloomberg News reports.
In Louisiana, Gov. Bobby Jindal faces a $1.6 billion budget hole, according to Bloomberg – and the governor is, among other things, insisting on keeping a tax subsidy for the TV show “Duck Dynasty” that amounts to $415,000 an episode. Instead, the state is cutting items like spending for Louisiana State University, which has announced that it may seek insolvency as a result.
Budget-cutting combined with union-bashing was supposed to make Wisconsin a leader in job creation, but the state under Gov. Scott Walker has become a laggard, ranking 40th in job creation, according to the Bureau of Labor Statistics. Walker’s latest biennial budget plan was made in February in the face of a looming deficit that was projected to exceed $900 million by 2017.
Similar stories can be found almost anywhere conservatives control the statehouse and the state legislature. The verdict from at least one neutral corner of the research world confirms what people are seeing with their own eyes, if they choose to: Trickle-down “voodoo” is nothing but snake oil. The only puzzle is why Republican presidential candidates still think they can sell it.