Posted by Bob Lord
The AZBlueMeanie alerted me to Robert Robb's recent blog post at AZCentral, Economic growth realities and myths. Robb's post is based entirely on a recent study for the American Legislative Exchange Council, “Rich States, Poor States,” by Arthur Laffer, Stephen Moore and Jonathan Williams. Robb pretty much employs no critical thinking in his post. He takes what ALEC and Laffer have to say as gospel, then judges the Arizona legislature based on it.
The datum from the Laffer piece that Robb seizes on most is the outsized job growth in the 9 states with no personal income tax. 48% of the job growth in the last decade occurred in those states. The obvious implication, according to Robb: All states should strive for a zero income tax. Indeed, Robb says that Arizona should have that as a long-term goal.
But Robb doesn't bother to explore the long-term ramifications of his recipe for growth if all states took his (and ALEC's) advice. It really doesn't take much by way of critical thinking skills to noodle this out.
State income taxes are not all that onerous. Most states max out their income tax in the mid-single digits. So, by themselves, state income taxes can't have a significant impact on growth. The obvious reason the 9 zero income tax states have had relatively high job growth is simply that if everything else is equal, employers will gravitate to the lower tax states. ALEC and Laffer even make this point in the study.
But what if every state abolishes its income tax? That unavoidably would neutralize the advantage the 9 states gained. The other 41 states might recover some jobs from those 9 states, but they won't realize any further gains, because there will be no higher tax states left from whom to lure employers.
The net result: All 50 states will have decimated their revenue bases, with no net job movement or job creation in any direction. Great policy advice, Robert.
Contrast Robb's work for the Republic with that of Louise Story for the NY Times. I wrote about Story's piece here. Story reported on the devastating effect that the ALEC-encouraged competition for corporate residents was having on states and cities. The Times then ran an editorial entitled "Race to the Bottom," based on Story's work.
The ALEC / Laffer study, is a bit lengthy, so I didn't read it in its entirety. By all appearances, however, the upshot of the study is that for a state to improve its competitiveness, it should decimate its revenue base through massive tax cuts, pare services to the bone, and adopt policies, such as right-to-work laws, to minimize worker wages. Obviously, ALEC is doing all it can to accelerate the race to the bottom. Unfortunately, ALEC has had remarkable success on this front.
If Robb wanted to suggest policy here, he might have looked to federal tax policy. The race to the bottom among the states actually has been fueled by federal tax policy. For example, at one time, taxpayers received a credit against their federal estate tax for any state inheritance tax paid, according to a schedule. Pretty much every state adopted that schedule as the basis for its inheritance tax scheme, as doing so imposed no net additional tax on its residents. A decade or so ago, Congress replaced the credit with a deduction for state inheritance taxes. About half the states, including Arizona, reacted by eliminating their inheritance tax system. One of the factors Laffer now uses to rate the states in his study is whether they have an inheritance tax. This is a direct outgrowth of the change in federal tax policy.
The same has occurred in the income tax arena. Taxpayers genreally are allowed a deduction for state income taxes, which softens the impact those state income taxes have. The state income tax deduction allowed States to impose income tax without burdening their residents to the point state taxes might induce them to move to a lower tax state. But, over the years, Congress has reduced the effectiveness of the deduction for state income taxes. For example, state income taxes are not deductible for purposes of the alternative minimum tax. More significantly, Congress recently allowed taxpayers to choose between a deduction for state income taxes or state sales taxes. The effect of that change is to reduce the differential in federal tax benefits of living in a state that imposes an income tax versus one that doesn't, which of course increases the net cost of state income tax to the residents of states that impose one, thereby driving states to reduce or eliminate their income tax collections.
As a result of changes in federal tax policy, the lure of states with no income tax became far more tempting to employers. If Congress were to replace the deduction for state income taxes with a credit for the full tax paid according to a schedule (with a corresponding increase in federal rates), as it used to do for state inheritance taxes, the crazy, destructive race to the bottom would end. Unfortunately, Congress seeme to be headed in the opposite direction as it is considering further cutbacks in the deduction for state taxes.
All of this seems to be lost on Robb. I doubt it is to ALEC and Laffer, though.
I very rarely read Robb's columns or blog posts, but this is not the first time I've encountered shallow analysis on his part. A decade or so ago, he wrote an op-ed piece defending the budget deficits of then President Bush. His defense was based on the simplistic accounting used to determine the deficit. Robb pointed out that if the Government were a business, the purchase of a capital asset would not be considered an expense. Buying a vehicle, for instance, does not cause a business to incur a loss. So, according to Robb, if you took capital assets into account, Bush wasn't really racking up deficits.
I emailed Robb. I explained to him that he was 100% correct about the ridiculous treatment of capital asset purchases in stating the US budget deficit. Then I made what I thought was the simple point that the analysis could not stop there. If you don't expense the purchase of capital assets, you would have to expense the depreciation of capital assets. After all, a capital asset doesn't last forever. So, in recalculating the Bush deficit, I pointed out to him, consistency and accuracy would require that he take into account the depreciation of all the Government's capital assets.
To Robb's credit, he went back and forth with me on emails for quite awhile, often responding to me in minutes. But, in the end, by all appearances, he just didn't get this basic accounting concept I was pointing out to him. Hopefully, he went to an accountant friend of his for a fuller explanation. That very well could be the case, because, once Obama became the President on whose watch the deficits were occurring, he abandoned his capital asset approach.
On a personal level, Robb is a good guy. I actually knocked on his door when I was campaigning -- he lived in my district. And, although he was critical of me overall, his criticism wasn't over the top, and it's what I expected given his policial leanings and his likely friendship with Shadegg.
I just wish he would think a little harder before he writes.