The sales pitch is the same everywhere: Lower income taxes will lead to more jobs and higher incomes. The trouble is, this recipe has been tried before, and the results weren’t as good as advertised.
The Center on Budget and Policy Priorities, a liberal Washington think tank, recently looked at six states that enacted big tax cuts between 2000 and 2007, and five more that cut income taxes in the 1990s, and found that they gained no particular economic advantage.
“Cutting personal income taxes is not a sound prescription for economic growth,” says Mike Leachman, the center’s director of state fiscal research. “The evidence is pretty meager that they have worked.”
Among the recent examples, Arizona, Ohio and Rhode Island all lagged the nation in job growth and income growth after handing out tax cuts. Louisiana, New Mexico and Oklahoma outperformed the nation, but the oil and gas industry accounted for most of their gains.
The tax cuts in the 1990s were even less successful. The five big tax-cutting states have generated just one-third the rate of job growth that the rest of the nation experienced.
That’s hardly the kind of result that state senators John Lamping and Eric Schmitt, two Republicans who are among the chief sponsors of tax bills in Jefferson City this spring, envision for Missouri.
It’s reality, though. The CBPP study doesn’t contend that tax cuts caused some states to underperform, but it does argue that states can’t cut their way to prosperity.
The Show-Me Institute, a free-market think tank here, has commissioned a series of studies recommending that Missouri’s income tax should not just be cut, but eliminated entirely. It argues that income taxes distort the economy more than sales taxes.
That’s true, but a broad-based income tax is an effective way to raise revenue the state needs to deliver public goods. When higher taxes finance better schools and highways, Leachman says, the net effect may be positive instead of negative.
“It’s not like taxes don’t matter at all,” he adds, “but at the state level you have to balance your budget. You have to offset a tax cut by raising other taxes or cutting services. The damage you do to your public services can cause a weakening of your longer-term economic growth.”
It’s too early to know how Kansas, which cut its top income tax rate last year and eliminated all tax on certain small business income, will fare economically, but Missourians should be skeptical of the Sunflower State’s claim that it now has a superior business climate.
A CBPP study last year found that a big chunk of the Kansas tax breaks would go to passive investment funds and big businesses.
Fast-growing, job-creating firms “likely would see very little of the benefit,” the study said.
There are good and bad reasons to cut taxes. If Missouri’s Legislature is able to cut taxes because it has wrestled down the cost of the state’s many tax-credit programs, that would be a good reason.
Simply trying to keep up with a neighbor, with little evidence that the neighbor’s strategy is working? That’s definitely a bad reason.