ALEC Tax and Budget Proposals Would Slash Public Services and Jeopardize Economic Growth
End Notes
[1] Garrett Martin, 2012, “FACT SHEET LD 849 ‘An Act to Provide Tax Relief for Maine Citizens by Reducing Income Taxes’,” http://www.mecep.org/view.asp?news=2189 and Garrett Martin and Joel Johnson, 2012, “The Consequences of Maine’s Income Tax Cuts,” Maine Center for Economic Policy, http://www.mecep.org/view.asp?news=2287.
[2] National data show fewer than 4,000 taxable returns subject to the estate tax in 2013. And there is no sound evidence that federal estate taxes reduce national savings, thereby hurting economic growth. For more detail see: Jane G. Gravelle and Donald J. Marples, “Estate and Gift Taxes, Economic Issues,” Congressional Research Service, March 19, 2008, http://wlstorage.net/file/crs/RL30600.pdf; and, Chye-Ching Huang, Gillian Brunet, and Chuck Marr, “Reports Calling for Estate Tax Repeal Seriously Flawed,” Center on Budget and Policy Priorities, July 7, 2009, https://www.cbpp.org/sites/default/files/atoms/files/7-7-09tax.pdf.
[3] Arthur B. Laffer, Stephen Moore, and Jonathan Williams, 2012, Rich States, Poor States: 5th Anniversary Edition, p. 52.
[4] Arthur B. Laffer and Wayne H. Winegarden, March 2012, “The Economic Consequences of Tennessee’s Gift and Estate Tax,” 2012.
[5] Nicholas Johnson and Erica Williams, "Without A State Income Tax, Other Taxes Are Higher," March 2012.
[6] It is worth noting that in some publications, ALEC says it supports “a sensible, broad tax base” — a principle espoused by many economists across the spectrum. It defends the repeal of low-income tax credits (i.e., raising taxes on the working poor) partly on the grounds of tax-base broadening. But when it comes to businesses and investors, ALEC supports tax breaks that substantially narrow the tax base.
[7] Nicholas Johnson and Michael Mazerov, “Proposed Kansas Tax Break for “Pass-Through” Profits Is Poorly Targeted and Will Not Create Jobs,” Center on Budget and Policy Priorities, March 27, 2012.
[8] “Kansas tax act most regressive in nation,” Lawrence World-Journal, May 27, 2012.
[9] Elizabeth C. McNichol and Nicholas Johnson, 2010, “‘FairTax’ Proposals to Replace State Income and Business Taxes With Expanded Sales Tax Would Create Serious Problems,” https://www.cbpp.org/cms/index.cfm?fa=view&id=3285#_ftn6.
[10] Arthur Laffer, 2010, “The Missouri Compromise,” Show-Me Institute.
[11] John W. Pope Civitas Institute and Arduin, Laffer, and Moore Econometrics, 2012, “More Jobs, Bigger Paychecks,” http://www.nccivitas.org/2012/more-jobs-bigger-paychecks/. “Jindal outlines Louisiana tax reform plan goals,” Bayou Buzz Louisiana, http://www.bayoubuzz.com/buzz/item/253842-jindal-outlines-louisiana-tax-reform-plan-goals.
[12] Leonard Gilroy and Jonathan Williams, 2011, “State Budget Reform Toolkit,” p. 11. Note that contrary to Gilroy and Williams, state spending patterns are not profligate; state own-source spending as a share of the economy has been basically flat since the early 1970s.
[13] Iris Lav and Erica Williams, March 2010, “A Formula for Decline: Lessons from Colorado for States Considering TABOR,” Center on Budget and Policy Priorities, https://www.cbpp.org/cms/?fa=view&id=753.
[14] TABOR uses a formula for capping state resources that makes it impossible for a state to maintain at current levels even the most basic services, like schools and roads. The formula is based on overall population growth and inflation, as measured by the consumer price index (CPI). The problem with this formula is that the segments of the population requiring the most state services, such as senior citizens and children, often expand more rapidly than the population as a whole. Likewise, the CPI measures changes in the cost of goods people buy, like housing and food, not what governments pay for, such as health care. The TABOR formula is inadequate for keeping up with the normal growth in the cost of maintaining today’s level of services in future years, let alone new investments or improvements, and TABOR causes particularly severe problems during and after economic downturns.
[15] Michael Leachman, Nicholas Johnson, and Dylan Grundman, 2012, “Six Reasons Why Supermajority Requirements to Raise Taxes Are a Bad Idea,” Center on Budget and Policy Priorities, https://www.cbpp.org/cms/?fa=view&id=3678.
[16] Requiring voter approval for tax increases also impedes the legislature’s ability to function effectively and can have consequences similar to a supermajority requirement.
[17] Peter S. Fisher, Greg LeRoy, and Philip Mattera, 2012, “Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity,” The Iowa Policy Project and Good Jobs First. An earlier version of the Fisher, LeRoy and Mattera findings, published in an article by Fisher, has been challenged in a new ALEC report by Eric Fruits and Randall Pozdena entitled Tax Myths Debunked (February 2013). Fruits and Pozdena assert, for instance, that Fisher’s findings are flawed because Fisher compared a ranking (ALEC’s index) to a measures of values (percentage changes in per capita income, median family income, poverty, among others) when he should have compared two sets of rankings, and because he should have used a statistical technique specifically designed for rankings. Fisher has recomputed his correlations using Fruits and Pozdena’s preferred techniques, and reports the same findings as his original: better state ALEC rankings have tended to be followed by worse state economic-performance rankings. Fruits and Pozdena also assert that one should really judge ALEC’s index — not by the standard measures of prosperity that Fisher used — but rather by a little-used index of economic performance generated by the Federal Reserve Bank of Philadelphia. In fact, as Fisher explains in a more detailed forthcoming response, the Philadelphia Fed index as deployed by Fruits and Pozdena is unsuitable for this purpose. The Fed index measures states against a benchmark year (1992), rather than against the current economic health of other states. That means that states rank high or low depending on how their economy fares relative to 1992, not a very useful way to measure the impact of policies that were in effect in 2007. And when the Fed index is adapted to focus on changes since 2007, the correlation with the ALEC index is near zero. For these and other reasons (some of which are described briefly in footnotes later in this report), ALEC’s new attack on its critics is as flawed methodologically as earlier ALEC publications.
[18] For example, inRethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, Economic Policy Institute, 2004, p 19, economist Robert Lynch concludes from his review of decades of economic research: “There is little evidence that the level of state and local taxation figures prominently in business location decisions... and that state and local taxes and incentives are not the only, or the primary, influence on business investment decisions.” Economists Stephen T. Mark, Therese J. McGuire, and Leslie E. Papke reviewed the literature on business location and expansion decisions and found that “The studies do make clear that a policy of cutting taxes to induce economic growth is not likely to be efficient or cost-effective in the general case.” See “What Do We Know About the Effect of Taxes on Economic Development? Lessons from the Literature for the District of Columbia,” State Tax Notes, August 25, 1997, pp. 508-509. A study by the Illinois Commission on Government Forecasting and Accountability reviewed all state rankings by business tax climate made by various organizations and reviewed the literature on the subject. It concluded: “State and local tax cuts and incentives are not effective for stimulating economic activity or creating jobs in a cost-effective manner.” Illinois Tax Incentives, July 2009. Many other studies that considered the effect of taxes on business location, small business formation, and entrepreneurship rates have come to similar conclusions.
[19] See the reviews of research on why public services matter in Peter Fisher, “Corporate Taxes and State Economic Growth,” Iowa Fiscal Partnership, revised February 2012; Jeff Thompson, "Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure, and Tax Incentives," Political Economic Research Institute, University of Massachusetts, 2010; and Robert Lynch, Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, Economic Policy Institute, 2004.
[20] This figure is the result of dividing the value of the total state and local taxes paid by businesses as estimated by the Council on State Taxation (or COST, an organization representing major multistate corporations on state tax matters) by the dollar value of corporate expenses as reported by the IRS. For a more detailed discussion of this figure, see note 4 in Michael Mazerov and Mark Enriquez, “Vast Majority of Large Maryland Corporations are Already Subject to “Combined Reporting” in Other States,” Center on Budget and Policy Priorities, November 2010.
[21] Lynch, Rethinking Growth Strategies.
[22] Rich States, Poor States, p.ix.
[23] N. Gregory Mankiw, Principles of Economics, Dryden Press, Fort Worth, TX, 1998, pp. 29-30.
[24] Diamond and Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,” CESifo Working Paper No. 3548, August 2011.
[25] Mickey Hepner, February 20, 2012, “There’s no free lunch with tax cuts,” http://www.edmondsun.com/features/x1058958938/No-free-lunch-with-tax-cuts.
[26] “Solving the Problems of Economic Development Incentives,” Growth and Change, Spring 2005, p. 142. For further discussion of these issues, see Michael Mazerov, “Cutting State Corporate Income Taxes Is Unlikely to Create Many Jobs,” Center on Budget and Policy Priorities, September 14, 2010.
[27] Arthur B. Laffer, Stephen Moore, and Jonathan Williams, 2012, “Rich States, Poor States,” p. 29.
[28] Andrew Leigh, “Do Redistributive State Taxes Reduce Inequality?” National Tax Journal, March 2008.
[29] Howard Chernick, “Redistribution at the State and Local Level,” Public Finance Review, 2010.
[30] See, for instance, Andrew G. Berg and Jonathan D. Ostry, “Equality and Efficiency,” in Finance & Development, September 2011, Vol. 48, No. 3.
[31] Jeffrey Thompson, “The Impact of Taxes on Migration in New England,” working paper, Political Economy Research Institute, University of Massachusetts, Amherst, April 2011; Tami Gurley-Calvez and Katherine Harper, “Do Taxes Affect Interstate Location Decisions for High-Income Households?” Proceedings of the 99th Annual Conference on Taxation of the National Tax Association, 2006.
[32] Jon Shure, Robert Tannenwald, and Nicholas Johnson, “Tax Flight is a Myth,” Center on Budget and Policy Priorities, April 2011; Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes: Evidence from a Natural Experiment,” National Tax Journal, June 2011.
[33] Charles Varner and Cristobal Young, 2012, “Millionaire Migration in California: The Impact of Top Tax Rates,” Stanford Center on Poverty and Inequality, http://www.stanford.edu/group/scspi/_media/working_papers/Varner-Young_Millionaire_Migration_in_CA.pdf.
[34] Iris J. Lav and Kim S. Rueben, March 20, 2007, “Lower Taxes and Economic Growth: Response to a Flawed Analysis,” Center on Budget and Policy Priorities, https://www.cbpp.org/cms/index.cfm?fa=view&id=1247.
[35] CBPP analysis of data from the U.S. Bureau of Economic Analysis.
[36] “Does It Hurt a State to Introduce an Income Tax?” State Tax Notes, December 6, 2010.
[37] “Arthur Laffer Regression Analysis Is Fundamentally Flawed, Offers No Support for Economic Growth Claims,” February 2012. In the Tax Myths Debunked publication cited above in footnote 18, ALEC defends itself against ITEP’s critique by asserting that it is legitimate to include federal tax rates in an analysis of state tax policy. That is true in some cases, but not in this case, because including the federal rates obscures state-to-state differentials that after all are the focus. The ALEC publication does not dispute ITEP’s central finding that, had Laffer focused solely on state tax rates, the results would have been opposite from those on which he relies so heavily in drawing his conclusions.
[38] Jonathan Willner, “Putting Real Economics into an Economic Assessment of the Oklahoma Income Tax,” http://dl.dropbox.com/u/19732897/Willner-PuttingRealEconomics_into_an_Economic_Assessment_of_the_OklahomaIncomeTax.pdf.
[39] Kent Olson, “The Voodoo Economics of Phasing Out Oklahoma’s Personal Income Tax,” March 14, 2012, http://dl.dropbox.com/u/19732897/OLSON_VOODOO_PHASING_OUT_INC_TAX.pdf.
[40] Institute on Taxation and Economic Policy, April 2012, “Repealing Estate Tax Will Not Create an Economic Boom. Laffer/Winegarden Report Utterly Fails to Support Claim That Tennessee’s Estate Tax Cost State 220,000 Jobs.” In its report Tax Myths Debunked, ALEC defends Laffer and Winegarden’s report on theoretical grounds but provides no empirical evidence to dispute ITEP’s core contention that factors other than the estate tax — such as the fact that many of the comparison states had significant extractive-industry sectors in a decade when those sectors boomed —could explain much or all of the growth differential in the 2000s. Tax Myths’ authors also provide results of their own modeling of estate tax repeal in Tennessee that they claim confirms Laffer’s results, but they provide no clues as to their methodology, and in any case the results are quite a bit different from Laffer’s, although similarly hard to believe.
[41] Moore also previously worked at the Heritage Foundation and the Cato Institute.