States, Taxes, and Growth
The cover of the January 2008 issue of Governing magazine serves up an attention-grabbing headline of "Growth and Taxes."
Did this special report take a serious look at how taxes impact state economic growth?
Well, there was some passing recognition. At one point, for example, it was noted: "The competitive strengths in the U.S. are in innovation, productivity, marketing and entrepreneurship. All of these things can be either helped or hurt by the nature of the states' tax systems..." At another point, there is acknowledgement of "the most basic, underlying issue: creating a tax structure that encourages economic vitality."
Unfortunately, though, the main thrust of this series of articles downplays the negative effects that taxes have on consumers, businesses, entrepreneurs and investors; and actually embraces the silly notion that government is a key player in boosting economic prosperity.
There's a lot of talk equating government spending to making "investments." According to this spin, government doesn't waste any money, but instead "invests" it.
The opening sentence actually sets the tone: "It's been known for a long time that obsolete state tax systems are not producing the revenue states need."
Really? Consider that just over the period of 1995 to 2005 (latest U.S. Census Bureau data), state and local total revenues increased from $1.42 trillion to $2.52 trillion. That was a 77 percent jump, compared to inflation of 22 percent (according to the GDP price deflator) over the same period. Revenues grew at better than three times the rate of inflation.
So, in reality, state and local tax systems are not having any problems raking in big bucks for politicians to spend. Apparently, the authors of the Governing report on state tax systems have a difficult time discerning between a need and a want, that is, between what government needs to spend and what politicians want to spend.
The report notes that many states have "obsolete," "outdated," "unfair" and "antiquated" tax systems. However, Governing again seems definition-ally challenged. Taxpayers - including entrepreneurs and small businesses - understand that these terms, properly understood as applied to taxes, mean that taxes are too high, costly to comply with, and do damage to the economy. But Governing's almost exclusive focus here is on removing barriers to state and local governments being able to suck away more resources from the private sector to be used by government.
There's some talk that low tax rates can "theoretically" drive economic growth. But that's pooh-poohed by a professor who, according to Governing, "makes clear, in reality, lower taxes tend to lead to service reductions, some of which inevitably fall in areas that fuel economic vitality."
So, the traits of a good, twenty-first century state tax system, according to this report, include having taxes reach deeper into the pockets of service providers, expanding taxation of Internet transactions, casting a wider tax net on businesses, setting up a tax system whereby government doesn't lose revenue during recessions, and getting rid of tax and expenditure limitations. On measures that limit taxes or spending, the Governing report concludes: "The bottom line ... is that the TEL makes it much more difficult for cities and towns to raise the revenue they need."
In the end, this report was not about state economic growth and taxes. Instead, it's all about establishing a tax system that brings a steadily increasing amount of revenue to the government. It's about government's growth and taxes. _______
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
