|
|
| |
| Sat, Nov. 22, 2008 |  |
 |
|
||
| |
Taxes and the economy Wednesday, Oct 19, 2005 By David Sanders Discussions about economic advantages or disadvantages related to tax policy are often approached in basic and sometimes misleading terms. It's a long-running pet peeve of mine. When tax policy's impact on the broader economy is discussed in practical or theoretical terms, it's often reduced to a discussion about state treasury receipts. Here's part of the problem. Revenue-drunk state officials and an uninterested political press usually combine and thereby confuse the economy's strength (or weakness) with state revenue collections. The resulting stories about revenues (and by association, the economy) are usually limited to year-to-year comparisons of gross tax receipts. The casual observer is left to conclude that if revenues are up, then the economy must be humming along or vice versa. Broader measures like income, gross state product (GSP) and job creation, which give a more accurate measure of the economy's strength and also provide for comparisons with other states, aren't reported with the flare that revenue numbers are given. A revenue-centric perspective results when one falls into the habit of using gross receipts interchangeably with economic strength or weakness, especially in an environment when tax increases are the norm. High revenue collections in a higher tax environment create the false impression that the economy is on solid ground, when all it actually does is show how well the state can suck money out of the private economy, which may or may not be on solid ground. As unbelievable as it may sound, that approach can also create the false impression that state government and its well being, not the private sector, determines the state's economic strength. This mindset has perpetuated administration officials, lawmakers, lobbyists, bureaucrats and even businessmen and women who have lined their pockets with government business for years. When the subject of tax cuts or increases is broached, it is usually reduced to a slanted discussion about how the potential changes in tax rates would positively or negatively affect the state treasury. Tax debates in Arkansas are often devoid of any analysis of how tax cuts help or tax increases hurt individuals, families, small businesses, large corporations, broader economic activity and the state's competitive position with surrounding states. There are those who contend that tax rates have little impact on economic activity. Tax agnostic arguments, while easy to make, aren't true. The academic literature suggests that state and local tax rates affect economic growth. Numerous states have used tax policy (not give away programs) successfully as a tool for growth. For years, this column has lauded the use of pro-growth tax reform as a mechanism to expand the state's economy, which ranks next to last in per-capita income. I have argued for aligning the state's tax rates with regional averages so that we are competitive when trying to lure high-paying jobs. I have argued that we should lower other tax rates (mainly the income tax rate) to encourage small businesses located within Arkansas' borders to create jobs. Nearly every time I have made such a suggestion in writing or on a radio or television commentary, I would hear from some state legislator, bureaucrat or an earnest liberal who would tell me the state couldn't afford to cut taxes because it needs to pay for the needed programs for the poor. My response usually falls somewhere between: "You mean the state can't afford to grow its economy?" or "You don't think a poor person would rather have a job?" Theirs is a weak position. At least one candidate for governor is interested in talking about tax policy as a mechanism to grow the state's economy. Asa Hutchinson has the luxury of being a candidate and hasn't yet been bludgeoned by bureaucrats and lawmakers telling him he can't talk about cutting taxes. Get ready Asa, it's coming. In the meantime, welcome to the fight. For further reading: "Do state and local taxes affect relative state growth?" Economic Review - Federal Reserve Bank of Atlanta. March/April 1996; "The effect of state and local taxes on economic development: A meta-analysis," Southern Economic Journal, October 1995; "Marginal tax rates and state economic growth," Regional Science and Urban Economics, December 1994. ------- David Sanders writes twice weekly for the Arkansas News Bureau in Little Rock. His e-mail address is DavidJSanders@aol.com. |
