The tax cut conundrum

The liberals who want to raise taxes, and who have never met a government spending program they don’t support, are starting to make the argument – or starting to make it in a more public way – that tax cuts don’t spur growth and that it is just fine to raise taxes during an economic downturn.

This Dayton Daily News article is a good example:

Ohio instituted a 21 percent income tax cut, beginning in 2005, and Gov. Strickland expanded the homestead property tax exemption program so that all homeowners over 65 or disabled would qualify. Without those tax breaks, the state would have had an extra $6 billion for the two-year state budget.

“The tax cuts were sold on the basis that they would cause growth,” Zeller said. “Of course, no growth resulted. Ohio’s streak of subpar job growth below the U.S. average was extended to 159 consecutive months despite the tax cuts. Other research has shown definitively that other measures of economic growth were not improved after the tax cuts were enacted.”

See, they say, we cut taxes and nothing happened so that proves you are wrong.  Let’s raise taxes – or at least stop the cuts – and protect the most vulnerable.

The problem with this argument is that it ignores two things: 1) the tax cuts are just one aspect of a overall environment for economic growth 2) the tax cuts have been overshadowed by political bickering and bad salesmanship (particularly by the GOP).

I will get into the political damage in another post, but allow me to sketch out some of the problems that have led to the tax cuts not spurring as much growth as had been hoped.

One of the major problems Ohio experiences, in my mind, is the inability to effect change at the local level in key urban areas.  Yes, at the state level Ohio enacted some policies aimed at attracting businesses and entrepreneurs by reforming the tax code.  But in the large urban areas the environment remains largely the same.

Cities in Ohio have high tax rates when you add up all various piggybacked taxes and rates.  They have troubled education systems for the most part.  And they are dominated by labor, and public sector, unions and various non-governmental social service groups (aka liberal Democratic interest groups).  And a number of the urban areas are rife with corruption and scandal.  This is not an environment conducive to attracting business and capital.

And at the state level,  a segment of the policy focus has also been contrary to the larger pro-growth agenda represented by the tax cuts.  Via ballot or law the minimum wage has been raised and various health benefits and insurance  mandates have been imposed. These, often high profile campaigns, raise the cost of doing business and project an anti-growth environment.

As a side note, the public often seems clueless on the impact of this process.  They raise the minimum wage and then are shocked when high school and college students have trouble finding jobs.  As if the two are unrelated.

Last but not least, Ohio has done a terrible job of trumpeting the changes to its tax system.  Republicans have gotten no credit for lowering taxes (more on the politics of this later) and deep disagreements within the business community meant the changes were litigated rather than celebrated (Ohio’s reliance on retail and manufacturing doesn’t help in this).

As a result of all of this, it seems to me that Ohio’s reputation as a high tax and high regulation state has gone unchallenged.  Perception plays a critical role in this process an Ohio’s perception remains a negative one.  This has undermined its ability to attract growth and innovation.

These things take time.  A state’s reputation doesn’t change overnight.  And tax cuts don’t magically lead to huge growth spurts absent a variety of other factors.  But the tax reforms remain an important foundation moving forward and abandoning them will not lead to growth but instead create one more hurdle to clear once a recovery starts.

Liberals never seem to lose their faith in the ability of government to spend its way out of trouble and yet if tax cuts or reforms don’t immediately lead to undeniable benefits then they want to repeal them.  Giving into this temptation now will only reinforce this short sighted perspective.  Policy makers need to hold the line so the few postive steps that have been taken are not lost during this crisis