During Governor Ducey’s inaugural address in 2015, he indicated that he would not support higher taxes with: “prosperity moves, and as taxes go up, it moves away. Gone as well are jobs, people and companies that found a better welcome someplace else.” Likewise, during his 2016 State of the State address, he bragged about lowering taxes and assured Arizonans that he will “lower taxes this year. Next year. And the year after.” Yes, he has been consistent about his promise to lower taxes and even to do away with the state income tax. He obviously subscribes to the GOP mantra of supply-side (some call it trickle-down) economics.
The basic theory of supply side economics is that marginal tax rates and less government regulation will help business expand and create more jobs. The Laffer Curve, named after Arthur Laffer, is a central theory of this philosophy and posits that lowering tax rates generates more economic activity eventually leading to more tax revenue. Proponents of this philosophy include the Koch-brothers-financed American Legislative Exchange Council (ALEC), Americans for Prosperity, and the Wall Street Journal’s editorial board. They claim that the nine states without personal income taxes are outperforming the rest of the states and that their success can be easily replicated in those states that abandon their income tax. The non-partisan Institute on Taxation and Economic Policy (ITEP) however, says that Laffer focused on “blunt aggregate measure of economic growth” to support his contention. The truth says ITEP, is that states with personal income tax, even those with the highest rates, are experiencing as good, or better, economic conditions than those without. Still, there are plenty of examples of governors who insist on leading their states down the proverbial rabbit hole.
Take Governor Sam Brownback for example. When he took the reins in Kansas, he dropped the top income-tax rate by 25%, lowered sales taxes and created a huge exemption for business owners filing taxes as individuals. Now, five years after doubling down, his state lags in job creation, tax revenue is far short of expectations and bond and credit ratings have been downgraded.
In Oklahoma, Governor Mary Fallin and the GOP-led Legislature enacted a quarter-point reduction in the top income tax rate two years ago and corporate tax breaks when oil crude prices were riding high. Oklahoma’s Republican Treasurer Ken Miller, who advocates for revenue-neutral tax cuts, blamed his GOP colleagues for the now “self-inflicted” crisis. Miller said: “Common sense dictates that until the state proves it can live within its means, it really should stop reducing them, yet some ‘thinkers’ continue to advocate eliminating the state income tax – even arguing that the state’s largest funding source and be vanished without a replacement and still fund needed teacher pay raises.” To Arizonans I ask: “sound familiar?”
In Wisconsin, Governor Walker enacted several permanent tax cuts just as the national recession ended and state revenues began to climb. His speech this year to ALEC was all about how his “big, bold reforms took the power out of the hands of big government special interests.” What he didn’t say is that his reforms produced only about half of the jobs he promised and resulted in delayed debt payments and deep cuts to education to balance the budget.
In North Carolina, with all three branches of government now securely under GOP control, money saved from cutting safety net programs wasn’t reinvested into education, job training or infrastructure, but given to the wealthy and corporations in the form of tax breaks. In September, the NC legislature signed a budget into law that provides $400 million in income tax cuts to be offset by taxes on repair, installation and maintenance services. Alexandra Sirota, who studies tax policy for the NC Justice Center said the affect of the lower taxes “is a huge revenue loser” and that “the revenue losses aren’t fully accounted for in the next few years.”
At the root of it all are ALEC’s questionable economic and fiscal assumptions and faulty analysis. Specifically, these policies include deep cuts in income taxes, particularly for affluent households and corporations; a repeal of state income and estate taxes; and a shift in state revenues from graduated-rate income taxes to sales taxes that are much higher than what exist today. They also include the end of various state-based tax credits for low-income working families; a Taxpayer Bill of Rights (TABOR) that would impose rigid constitutional limits on state revenues and spending; requirements that state legislatures garner two-thirds or other “super-majority” votes to raise any taxes or fees; and other mechanisms to reduce the funds available to finance public services. ALEC also pushes the repeal of state personal and corporate income taxes, which typically provide one-third to one-half of a state’s funding for schools, health care and other services. Finally, ALEC and its supporters fail to acknowledge that public services such as education or infrastructure are important to a state’s long-term prosperity.
Mainstream economic research though, shows that state taxes average less than one percent of a business’ total costs. Extensive economic research indicates that tax-funded public services like education, health, transportation, and public safety are more important for attracting businesses and jobs. In fact, Paul O’Neill, former CEO of Alcoa and President George W. Bush’s first Secretary of Treasury said: “[As a businessman] I never made an investment decision based on the Tax Code…[I]f you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements, they do it because they can see that they are going to be able to earn the cost of capital out of their own intelligence and organization of resources.” Robert Ady, of Ady International has assisted in countless business site locations. He says that “subsidies cannot make a bad place good.” Good places are competitive because their long-term business basics (labor, materials, marketing, overhead, and transportation) are solid. As Greg LeRoy, founder and director of Good Jobs First, said in his book The Great American Jobs Scam, “any subsidies are icing on the cake, but the cake is already baked.”
Yet, Governor Ducey insists on following the ALEC playbook with his plan to eliminate state income tax. During his gubernatorial campaign, he promised not to postpone a $225 million corporate tax cut to be phased in over three years. To the Arizona Tax Research Association, Ducey bragged about signing legislation to index the state’s income tax brackets ensuring salary increases that don’t outpace inflation don’t bump earners into higher tax brackets. Ducey claimed it was “an important first step in our mission to reduce income taxes in the State of Arizona every year.”
Stay tuned for the second half of this post in which I’ll explain why I claim Governor Ducey’s promise to lower taxes is a lie. Small spoiler alert…he may be committed to reducing INCOME taxes, but there is WAY more to this story.