I was born with something broken in my brain that makes me enjoy economic and public policy debate. However, one current debate is irritating me. There is significant disagreement on tax policy changes and how they affect the economy. This issue has hit front and center as state policymakers will likely consider further tax law changes over the next several years. The “Left” is spending a lot of time complaining about past actions while the “Right” is arguing that more is always good. The entire debate is misinformed. I recommend the Dems and Reps share some ice cream, take a seat on a curb, and read carefully.
First, Give Him a Break
As a quick aside, get off Ducey’s back. He is spending more time than any previous Governor promoting the state and looking at the full array of what drives economic growth. He is beginning with our strengths and with low cost items. He is currently putting fiscal stability in front of personal preferences. I rarely care what somebody else thinks, so this is my informed and unbiased professional opinion.
The Left v. Right Debate on Tax Cuts
Now for the very simple answer to this ridiculous debate. The value of tax cuts don’t matter. It’s the resulting effective tax rate and wider array of cost competitiveness that can advance or restrict economic growth. No business looks at a region and asks for the amount taxes were cut either recently or ten years ago. They will ask about the cost of doing business and this covers a lot of things. This is important to understand. It means not all tax cuts will have the same impact on economic growth, and this is just one piece of a large pie. The goal should be for creating a competitive and fair set of tax rates that allow businesses to thrive with limited government involvement, but rates that allow enough revenue to be collected to provide what government is supposed to provide. If a tax rate is already competitive, then the resulting benefits from a cut will be less than if the rate is currently oppressive. In general, lower taxes will help with economic growth. However…
Other Things Matter Too
Lots of things make an economy tick and we live in a world of limited resources. Each year state policymakers will develop a forecast of revenues and calculate expenditures that are required by law. After some additional negotiation, an amount is set aside for economic issues. This “money” can be spent on tax cuts, infrastructure, workforce issues, economic development programs, etc. Businesses will also ask about these issues. Yes, spending on any of these items could help with economic growth if you conduct your analysis in a box. But, spending on one item means less spending on another. Choices need to be made.
We also talk about government operating more like a business. I have three people at my company and we strategize every week and have a clear plan for not only the current year but also the next. Small, medium, and large companies all do this. The state needs to do more advanced strategic analysis as well. A return on investment (ROI) needs to be conducted on each of the listed economic “spending” areas. If proper research is done, an efficient balance can be identified. Thus, simply saying a tax cut is good or bad without additional research into tax rates and opportunity costs is not enough. Do the math or sit down.
What About the Referenced Research Reports?
Both sides of this debate regularly reference research about how one particular item does or does not help with economic growth. Kansas is the current darling of the Left due to recent budget problems. The Left stepped too far with their argument though. We are not Kansas and this one issue is not the sole driver of economic activity in that state. This can indeed be used as a cautionary tale about not having a balanced economic development plan as well as a balanced budget. However, that is not dramatic enough in politics.
The Right can be just as bad. A single report (or multiple reports) that shows a correlation between tax cuts and economic growth does not represent proof of anything. Unless these reports incorporate every item that makes those communities, regions, or states tick (and none of them do), then the results are invalid. We don’t even need to go that far. I will say it again, the tax cut doesn’t drive economic activity, the competitiveness of the rate and the competitiveness of the broader list of factors drives economic prosperity.
I will save my personal recipe for finding the right economic development equilibrium for a later post. However, in politics the loudest advocates usually represent one thing, and it’s the most important thing in the universe to them. This is why compromise is difficult, and why everything I have just written about analyzing each piece of the larger pie will never happen. But, it still makes for an interesting narrative.
Author’s note: If there is a particular economic or policy issue you would like covered in a later publication feel free to send your ideas and/or comments to [email protected]