Horizon, Host: Ted Simons

February 26, 2013


Host: Ted Simons

Impact of Tax Cuts on the Economy


  • A study recently released by the non-partisan Grand Canyon Institute reveals that two decades of tax cuts in Arizona have not spurred economic growth. David Wells of the institute will tell us more about the report.
Guests:
  • David Wells - Grand Canyon Institute
Category: Business/Economy   |   Keywords: business, economy, taxes, tax cuts, ,

View Transcript
Ted Simons: Two decades ago Arizona's tax burden for individuals was at the national average. It's now about 25% less thanks to a steady stream of tax cuts. State lawmakers who passed the cuts promised a boost in economic growth but that's not happened according to a report by the Grand Canyon institute. David wells is here to tell us more. Good to see you.

David Wells: thank you.

Ted Simons: what exactly did this study look at?

Ted Simons: Well, Tom Rex, one of our fellows, wrote the study. He looked going back to 1969 in terms of our taxes relative to the national average and especially in the last two decades where Arizona has had a strong policy of reducing taxes to see how our economic growth compared to the national average. We were primarily interested in productivity improvements that we would see.

Ted Simons: so that's what you're looking at and you found that two decades of these tax cuts of concerted efforts to cut individual taxes especially, no economic growth at all?

David Wells: It's hard for people to think about. They say Arizona even Jim just mentioned Arizona is going to be one of the top five job growth states. We have been like that for 50 years -- '69. 43 years. We have been that way when our taxes were relatively higher and lower. It's not the job growth that we see any difference. The other thing we looked at, Tom analyzed, we want to think about there's a gap. Arizona workers are paid less than the national average. You're looking for improvement in our productivity. An indication of productivity improvement whether they closed that gap so that we were more in line with the national average. They haven't. We still have a gap between where we are and the national average.

Ted Simons: sounds like looking at your report, the tax cuts over the past 20 years costing the general fund about $3 billion?

David Wells: Right. About 3.1 billion. When you think about the fact that the general fund currently is about $9 billion, that's an additional third more than what we currently have.

Ted Simons: But doesn't -- I can see critics saying that's $3 billion a year. That is back into the pockets of people who will help stimulate the economy by spending that money.

David Wells: Well, certainly but it's also taken away from government services. You have to think about both sides of it. So there are lots of folks -- generally the government employs people, they put money into the economy, provide infrastructure, those are lowers in Arizona as a consequence of not having that money. Certainly it went to primarily upper income individuals. The taxes cut were primarily income tax. People with higher incomes generally pay higher tax.

Ted Simons: You're saying it's perhaps offset by the loss in terms of infrastructure and other government services?

David Wells: In terms of over all economic growth. There was no net gain. A lot of people would argue when you cut taxes it's supposed pay for itself with economic growth. An economist named Aruthur Lander in the late '70s who argued if you had a zero percent tax rate you would have no government revenue. If you had 100% no one would want to do any work and would almost have no government revenue. The idea somewhere in between the curve shifted. The idea if taxes are too high if you could lower the taxes you could get more economic growth but the tax rate in Arizona has never been that far off the national average. State and local taxes are less than 2% for a typical business and they pay their officers the same amount. It's not a significant business cost and we haven't really focused on business taxes, mostly on individual taxes.

Ted Simons: Lets do that. supply side economics, we have gone through that, and it's the dominant thought, especially at the Arizona legislatures as far as a way to stimulate the economy and yet when we look at business taxes, those really haven't changed all that much, have they?

David Wells: Yeah, and that's surprising. They didn't focus as much on business taxes because our business taxes are average whereas our individual taxes are significantly lower. We're one of the lowest even in the southwest. And business taxes would have more of an impact but even there it won't have a massive impact. The legislature has been slower to do. One of other things Tom noticed in his analysis was that a lot of the cuts happened when the economy was already doing pretty well. Generally the covers were flushed at the capitol and they a cut taxes. More of an ideological statement of reducing the size of government rather than effective tool to make the economy grow.

Ted Simons: It sounds like if you cut taxes at a certain time the impact isn't as strong. If the taxes are very high and you cut them, you get a pretty good impact. If the taxes aren't so high and you cut them you don't get much impact at all.

David Wells: Right. Right. That's really critical. I the temporary sales taxis about to expire. No one says when the tax goes down suddenly economic growth will be bigger and pay for itself. When in fact we'll have less revenue.

Ted Simons: with the business tax reductions phased in I think through 2018, with that phased in, is that the kind of thing where, yes, because business taxes haven't really been cut all that much we could see some stimulation there but by the time we get to 2018, any further business tax cuts will thought see much stimulation at all?

David Wells: That's what Tom Rex came up with, what we expect. It's about a $500 million cost. We don't expect it will pay for itself. It may generate economic growth because we're currently under utilizing our resources and our taxes are average.

Ted Simons: I want to get back to the idea that benefits are offset by state and local government cuts and that sort of idea. How do you measure that sort of thing? What do you look at?

David Wells: So essentially the study looked at job growth for each of the -- this is over an economic cycle. Looking at employee pay as well as per capita levels of income, we're essentially trying to see whether or not there's any indication that Arizona has a systematic improvement as a result of tax cuts. We didn't find that. It was about the same. We're not finding a fundamental structural shift in our economy. We really need to invest in things that will improve our human capital base. You want people with higher levels of education to get the higher level paying jobs. We haven't closed the gap there.

Ted Simons: Could it also be argued without these tax cuts things could have been worse?

David Wells: They could have been worse --

Ted Simons: You're saying there's no economic growth after two decades of tax cuts. Without tax cuts we could really have seen no economic growth.

David Wells: Arizona -- pretty similar to the national average. The idea is we would have seen something similar if we had not employed tax cuts. Of course what happened in 2008 was going to happen regardless. That was a nationwide housing crisis and financial crisis. That was going to hit Arizona regardless.

Ted Simons: what do we take from this report? What do you want people to learn?

David Wells: I think we need to be more careful when we think about the consequences to tax cuts. The legislature is looking forward if you look at the JOBC numbers you see $9 billion going through 2016. That's as far as they are budgeting out. Even though the economy is growing we're not having this added amount of revenue and we have a pent-up demand. We're not funding school repairs and construction. There are lots of things we're not funding. We don't have the money for it. We need to rethink the smartness of some of our tax cuts and think about whether or not they have been effective. Part of the budget deal under Governor Napolitano was she agreed to a 10% income tax reduction. We still have that. That was supposed pay in part for all day kindergarten. We don't have that any more. We have lost certain pieces but we still have the tax cuts.

Ted Simons: Very good. good to have you here.

David Wells: Appreciate it.

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