IOWA CITY, Iowa – A recent report in the Winston-Salem Journal1 highlighted the work of an Iowa economist who challenges popular business-climate rankings that give disproportionate weight to tax cuts.
State and local taxes don’t have much impact on economic growth, says Peter Fisher,2 the research director for the Iowa Policy Project who operates www.gradingstates.org. In fact, Fisher contends, “tax cuts can undermine growth if they impede the many public investments that actually play large roles in the prosperity of a state.”3
State and local business taxes are not significant determinants of growth – combined, they account for just 1.8% of the cost of doing business, Fisher says, and reduced taxes on business frequently result in cuts to public services that businesses need to thrive.4
As the prime example, he points to Kansas, where Gov. Sam Brownback signed a bill in 2012 that slashed income taxes and cut the state budget by 13%. But legislators overrode the governor’s veto this year and enacted a bill that rolled back most of the tax cuts.
“The experiment failed in part because the tax cuts did not produce the promised boost to the state’s economy. To see how far they fell short, consider that the state of Kansas had not been a laggard before the cuts. From 2001 through 2012, the state had actually grown faster than the U.S. as a whole. But for the four years since the tax cuts took effect, the Kansas economy has grown at just half the rate of the U.S. economy.”5
To the extent they result in cuts to investments in education and infrastructure that are required for long-term growth, Fisher says, tax cuts hurt a state.
“As of 2015, the average state was spending 20 percent less per pupil on higher education than it did in 2007-08, leading to rising tuition and reduced access to post-secondary education. These funding cuts will have harmful long-term consequences for the nation’s growth and prosperity if not reversed,” his site says.
Fisher told the Journal that growth occurs more often in states that emphasize education spending.
“In the long run, (North Carolina) is shooting itself in the foot if it continues to cut business taxes, which are already among the lowest in the country on many measures, at the expense of education, working (sic) training, infrastructure or investments that enhance the quality of life,” he said.
“One thing that is pretty clear from research on state growth over a long period is that states with a more educated workforce have seen greater gain in income,” Fisher said. “The key to rising incomes and wages is increased productivity.”6