Senate tax plan misses the boat on taxes and economic growth

During yesterday’s Finance Committee debate over the latest iteration of the Senate’s billion-dollar tax cut plan, the bill’s sponsors repeatedly referenced the need to improve North Carolina’s economic competitiveness as the chief reason to cut income taxes.  While generating new job creation and economic growth is clearly a top priority for North Carolina, deep tax cuts to corporate and personal income tax rates are just not an effective way to accomplish these goals.

Much of the “evidence” tax cut proponents have cited in support of their proposals have been thoroughly debunked—both by the research of academic economists and the actual experience of states that pursued these policies. For example, out-of-state groups like the Tax Foundation have misleadingly claimed that “23 of 26” academic studies have shown that taxes hurt economic growth, but it turns out that these studies were either misquoted, cherry-picked, or failed to address the issue of tax policy at the state level.

Instead, a full look at the evidence reveals that tax cuts just don’t deliver. A panel of highly-respected economists from the state’s leading universities came before the Senate Finance committee last month and gave their much more rigorous and informed  response—one also at odds with the Tax Foundation study and the views of Senate leadership. In their experience, these economists said, there was no economic consensus that cutting taxes would lead to improved economic growth.  And they also noted that it would be important to consider the negative effects of reducing state spending if that was the way tax cuts were “paid for.”

Here is a quick review of key points on taxes and economic growth:

Tax cuts failed to boost states’ economic performance. According to the nonpartisan Center on Budget and Policy Priorities, the 6 states with biggest tax cuts in 1990s created fewer jobs and generated lower income growth than states that did not cut taxes. In the 1990s, six states cut their overall tax levels by 10%, more than any in the nation—Colorado, Connecticut, Delaware, Massachusetts, New Jersey, and New York. Yet they experienced slower job growth (0.3 percent per year) than the remaining 44 states that did not pursue this strategy (1 percent per year) over the next decade. Similarly, the personal income growth in tax cutting states was slower than in the remaining states.

High taxes have not hurt state economic growth.  The 9 states with the nation’s highest income tax rates –including California, Ohio, and Maryland—have experienced better economic performance than the 9 states with the lowest income tax rates, including Texas, Tennessee, and Florida. From 2001-2011, high-tax states experienced an average 10.1% growth in Gross State Product, while the low-tax states grew slower, at 8.7%. Likewise, high tax states have seen their median household income remain basically flat, while residents of low tax states saw their incomes fall by 3.5%.

Corporations are unlikely to expand or relocate because of state income tax cuts. State and local taxes are typically only 2 percent or less of business costs.  Expenses for labor, property, equipment, and transportation are much more substantial. Far more important to businesses’ decisions about hiring is whether there is customer demand. Today demand is low, which is why so many companies across the nation are sitting on record profits rather than expanding. A business that gets a tax cut will not hire if it doesn’t feel it can sell more of what it makes. And when demand does increase, businesses will hire whether they have gotten a tax cut or not.

The evidence is clear—income tax cuts are a poor strategy for boosting North Carolina’s economy.