The chief economist of the Small Business & Entrepreneurship Council complained this week that states have raised taxes in the recession — which he says hurts the economy. The commentary was far off the mark in ways that could threaten states’ ability to make the investments needed to create jobs and promote economic recovery.
First of all, it’s grossly misleading to say states raised taxes and just leave it at that. Every one of the more than 30 states that have raised taxes since the recession caused a historic collapse in revenues also cut spending. In fact, states cut spending by more than they raised taxes. But states realized that if all they did was cut spending, the resulting job losses and weakening of public services would make a terrible crisis even worse.
Second, the argument that tax increases suck money out of the economy ignores what states do with the revenues they collect. States spend it — quickly and close to home — on salaries, purchases from private businesses, and the like. That puts money back into the economy, which is especially important when the private sector is faltering.
If states relied on a cuts-only approach to this crisis — instead of a balanced approach that also includes higher revenues — two things that are bad for business (and everyone else) would happen. Investments in education, public safety, transportation, and all the other building blocks for economic growth would suffer. Also, already high unemployment rates would just get higher. More public-sector and private-sector workers would lose their jobs.
There’s nothing businesses need more today than customers. Cuts-only state policies that slow the economy and put more people out of work would harm businesses where they need help the most — at their front door.