Even though 2016 is still months away, the campaign has begun in earnest. As a result, it’s time to look for politicians to start talking about taxes, trying to convince us that their plans are the best plans.
One of the common assertions made on the campaign trail is that tax cuts can lead to job growth. But is that really true? And even if it is true, is the difference great enough to truly matter?
An article appearing on Forbes indicates that, at the state level, the payoff from tax cuts hardly justifies the policy move.
States Might Be Better Off Retaining Tax Levels
Research collected by Aitbek Amatov (under the direction of Forbes contributor Jeffrey Dorfman) for a thesis indicates that, while cutting taxes does increase employment, the reality is that the changes are not sufficient to make up for cuts to important state programs. Dorfman and Amatov cite higher education as beneficial state spending and insist that the research collected indicates that cutting taxes will not provide the job growth necessary to overcome spending cuts that are likely to accompany tax cuts.
The two ran models suggesting lowering the top marginal individual state income tax rate and found that a cut of one percent below the current level only resulted in an employment increase of about 0.05 percent. This doesn’t represent a result that is worth the cost. Amatov and Dorfman used higher education in their example, but point out that there are similar results for state infrastructure spending. Here is what the Forbes article says about the research:
Most states get a significant share of their revenue from state income taxes and are required to maintain a balanced budget. If states cut taxes, they need to offset those revenue losses with spending cuts somewhere in their budgets. Our results show clearly that more state spending on higher education leads to more employment, so offsetting cuts in that part of the budget will just negate the job gains from the lower taxes.
This indicates that, for the most part, states can’t afford to create a tax cut that is big enough to make an appropriate change in employment. The Forbes article finds this especially true in states with smaller budgets. Pointing to the recent budget troubles in Kansas, where tax cuts and spending cuts have been applied for the last few years, the article insists that many states see a huge impact on revenues, while the change to the actual tax burden really isn’t that big.
Part of the reason that state tax changes are so insignificant has to do with the fact that most of the total tax burden is due to federal taxes. Changes to state taxes rarely have the same impact on individual taxpayers and businesses that changes to federal taxes do. However, while the burden is a relatively small change, the impact can be felt in total state revenue.
Tax policy is always a complicated subject to talk about. There are many layers to the tax code. However, one thing to keep in mind is that many of the societal benefits we take for granted are the result of the taxes we pay.