Bobby Jindal says slashing income taxes spurs economic growth. True or false?

English: Map of USA showing states with no sta...

Map of US showing states with no state income tax in red, and states that tax only interest and dividend income in yellow. (Photo credit: Wikipedia)

By Robert Mann

Gov. Bobby Jindal asserted on Sunday’s “Meet the Press” that “those states without an income tax actually do better in terms of economic growth.”

Touting his amorphous plan to abolish income and corporate taxes — to be replaced with higher sales taxes — Jindal claimed that his “tax reform” proposals will “protect our low- and middle-income families, allow our economy to grow more quickly.”

This is something we’ll be hearing often in the weeks and months to come, as Jindal and his supporters push hard to pass their plan.

But what about the assertion that abolishing income taxes equals greater economic growth?

It’s really nothing new, of course. It’s decades-old GOP “supply side” orthodoxy that the right-wing continues to push, despite a great deal of evidence that slashing taxes just decimates vital public services.

Consider these statements by Arthur B. Laffer (who gave us the 1980s supply side “Laffer Curve“), Stephen Moore, and Jonathan Williams in a 2012 report published by the American Legislative Exchange Council (ALEC), “Rich States, Poor States.”

In general, states that spend less, especially on transfer programs, and states that tax less, particularly on productive activities such as working or investing, experience higher growth rates than states that tax and spend more.”

. . . the evidence behind taxpayers voting with their feet—[is] very strongly against high taxes.”

The no income tax states outperform their high tax counterparts across the board in gross state product growth, population growth, job growth, and, perhaps shockingly, even tax receipt growth.

. . . the death tax is one of the worst possible taxes for state economies.

The problem with these statements, and many others in the ALEC report, is that they do not stand up to scrutiny.

That scrutiny comes in the form of a November 2012 report by Good Jobs First and the Iowa Policy Project, “Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity.” The report, written by Greg LeRoy and Philip Mattera, concludes:

A hard look at the actual data finds that the Alec-Laffer recommendations not only fail to predict positive results for state economies—the policies they endorse actually forecast worse state outcomes for job creation and paychecks. That is, states that were rated higher on ALEC’s Economic Outlook Ranking in 2007, based on 15 “fiscal and regulatory policy variables,” have actually been doing worse economically in the years since, while the less a state conformed with ALEC policies the better off it was.

Read the report for yourself. It’s a treasure-trove of evidence debunking the whole wacky supply-side economic theories that have long governed the Republican Party.

Here are a few helpful excerpts that are particularly relevant to those of us who live in states, like Louisiana, with governors totally beholden to the corporate interests that are selling this economic snake oil.

ALEC-Laffer claim that lowering state and local taxes produces much greater job growth; in actuality, such taxes are such a tiny cost factor for businesses, and come with higher taxes on others or lower quality public services, that such a strategy fails

ALEC-Laffer claim that a low top personal income tax rate is a key to small business success; in actuality, property and sales taxes—ignored by ALEC-Laffer—are far more important issues

ALEC-Laffer claim that high top personal income tax rates and the presence of estate and inheritance taxes cause large-scale out-migration of high-income individuals; in reality, migration has little to do with taxes, and there is no plausible case for state estate taxes affecting job-creating investment

The ALEC report asserts that state tax rates in many instances approach “Laffer Curve” territory, where tax cuts would actually increase tax revenue; in reality, tax cuts reduce revenue and result in the defunding of public goods such as education and infrastructure, which really do matter for economic development [emphasis added]

But here’s the remarkable finding in the Iowa Policy Project: states that swallowed ALEC’s economic snake oil and lowered or abolished their income taxes have done worse than states that did not.

. . . actual results are the opposite of the ALEC claim. The more a state’s policies mirrored the ALEC low-tax/regressive taxation/limited government agenda, the lower the median family income; this is true for every year from 2007 through 2011. . . . The relationship is not only negative each year, it also became worse over time: the better a state did on the ALEC Outlook Ranking, the more family income declined from 2007 to 2011. . . . The more a state followed the Alec-Laffer policies, the higher its poverty rate, every year from 2007 to 2011.

And what do LeRoy and Mattera prescribe in lieu of these wholesale tax cuts? First, they advise against slashing income taxes to spur small business job growth, explaining that incomes taxes

are low or nonexistent in the early years of a business when it is showing losses; they are payable only to the extent that a business has gotten off the ground and is generating a profit, and even then will often remain low, or nonexistent, for years as the early losses are carried forward. Clearly if a state wants to encourage entrepreneurship and help really small businesses, it should shift taxes from sales and property to income. But [ALEC’s] Rich States, Poor States would have us do the reverse. It’s another example of how ALEC and Laffer are fixated on progressivity (which most affects high-income individuals and larger corporations) and will employ any argument, valid or not, against it.

For those interested in learning what really does spur economic growth in states, the authors of the Iowa Policy Project study note that there exists “a large volume of research investigating this question over the past 40 years.”

And what is the conclusion of these studies?

The preponderance of the evidence from many dozens of studies over a period of 30 years or more is that business tax cuts, if they could be enacted without cutting public spending, have some positive growth effect on state economic growth, but that this effect is quite small. These statistically controlled policy experiments are in effect holding all else equal. It is important to understand what this means. The research does not imply that a 10 percent cut in taxes on business that is paid for by cutting 10 percent of the state budget would produce 3 percent growth. Such a balanced budget policy (and states of course must balance their budgets) might well produce no growth at all, especially in the long run, because budget cuts necessarily mean cuts in state and local services essential to the functioning of the economy. As [Professor Timothy] Bartik himself has said: “[A]n economic development policy of business tax cuts may fail to increase jobs in a state or metropolitan area if it leads to a deterioration of public services to business. An economic development policy of tax increases may succeed in increasing jobs if it significantly improves public services to business.”

Still not persuaded?

Then just consider the results of Jindal’s own tax-cutting experiment in Louisiana, enacted during his first legislative session in 2008. That’s the year that Jindal slashed personal income taxes by more than a billion dollars.

Was the result of those massive income tax cuts a windfall of tax revenue and robust econoimc growth?

In case you haven’t heard, the state’s budget deficit for the coming fiscal year is projected to be more than a billion dollars.

Note: Portions of this have been taken from an earlier post on this blog.

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15 Responses to Bobby Jindal says slashing income taxes spurs economic growth. True or false?

  1. Stephen Winham says:

    At least somebody in a responsible position is waking up to, or admitting, reality:

    Budget committee chair cautious on ending corporate income tax

    After days of budget hearings last week, the chairman of the Joint Legislative Budget Committee has concerns about the wisdom of doing away with the state’s corporate income tax, which is one of the tenets of Gov. Bobby Jindal’s proposed tax reform plan. Sen. Jack Donahue, R-Mandeville, who also chairs the powerful Senate Finance Committee, tells Daily Report he’s not convinced it makes sense to do away with hundreds of millions in revenue the corporate income tax generates at a time when the state is facing a $1.3 billion shortfall, including $800 million worth of cuts to health care. “We got $250 million from corporate income taxes this year, which helped us finish off the year,” says Donahue. “We keep cutting and cutting and cutting and looking at all the money we give away. … I don’t want to raise taxes, but I do want to look at all the options and sources of revenue.” Donahue points out that with so much industrial construction and expansion under way in the state, Louisiana is in better shape than many states, and yet is still faced with a tremendous hole in its budget. While the Jindal tax reform plan is supposed to be revenue neutral, Donahue says he is not sure the Legislature will be willing to take that risk. “I like the idea of making Louisiana more competitive,” Donahue says, “but there needs to be a little balance; because if we get rid of the income taxes and things don’t work out, we’ll never get them back.” —Stephanie Riegel

    Reprinted from B. R. Business Report Daily Report a.m. 2/25/2013

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  2. tls0 says:

    To properly grow the almighty private sector
    Is quickly done easily (almost no wait).
    It just takes a nonstop, fast-talking director
    who exorcises taxes which possess the state.

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  3. JMW70710 says:

    Makes me envious of all the out-of-state contractors currently working for the state. They fly in on Monday morning, leave on Thursday afternoons, and with the Jindal plan, won’t have to pay Louisiana taxes on the salaries they’ve earned in Louisiana from Louisiana taxpayers. Sure hope they buy lots of stuff while they’re here.

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  4. Judith says:

    I read the snake oil report a few months ago and am so glad you posted a summary of the results. This is the kind of information every legislator should know, and that every reporter in Louisiana should be using to educate the public. I won’t, however, hold my breath waiting for that to happen.

    Besides, I must keep reminding myself that ideology is what matters in policy formulation, not data. What fast-talking huckster has ever needed evidence?

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  5. . . .and conversely if we do the opposite of what Jindal is suggesting, which would be to eliminate the sales tax and keep the income tax and perhaps close a few loopholes, we would do a lot better.

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    • Robert Mann says:

      Isn’t it interesting that eliminating the tax that most punishes the poor and middle-income citizen never crossed their minds?

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      • Not so much. It’s entirely rational from their standpoint. What is not rational is that it never crossed ours. I think it’s time to propose our own tax reforms that actually spur economic growth, not simply ones that reward and enrich campaign donors.

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  8. the best says:

    Very few people have the skill to detail specific points in their posts. You obviously have a knack with words and hit a home run. Good work

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