Trickle-down economics leading states down road to Perdition
By ALAN J. ORTBALS
The U.S. Bureau of Economic Analysis recently released data on the growth of the Gross Domestic Product of each of the 50 states. Surprising to some, Missouri ranked 48th above only Michigan and Louisiana which was actually a step up. The Show Me State was 49th last year.
One of those flummoxed folks was Joe Haslag, a University of Missouri professor, Kenneth Lay Chair in economics, and chief economist at the Show-Me Institute, a St. Louis based think tank founded by local billionaire Rex Sinquefield.
Sinquefield is an interesting character. He grew up in an orphanage in St. Louis; moved to California and made his fortune managing money. He retired, returned to St. Louis and has been vigorously pursuing a political agenda ever since. He is a disciple of Arthur Laffer, the economist who exhumed “trickle-down economics” and rebranded it as “supply-side economics” as part of the Reagan Revolution.
Sinquefield is a true believer, and he puts his money where his mouth is. Not only does he fund the Show-Me Institute in order to turn out scholarly reports that jibe with his beliefs, he donates millions of dollars to select political candidates and funds pet causes. Because of Sinquefield’s efforts, for example, the subject of the city of St. Louis’s earnings tax comes up for a vote every five years.
He’s also pushed the idea of replacing Missouri’s income tax with a sales tax and was successful in getting legislation passed to reduce the state’s income tax rates if certain conditions were met. He’s got some fellow believers in the state house and he’s spending millions to try to put one of them in the governor’s mansion.
His greatest success was in Kansas where Gov. Sam Brownback drank the supply side Kool-Aid and pushed through massive tax cuts for the wealthy and eliminated them for many small-business owners. After signing the tax cut legislation in 2012, Brownback pledged that they would act as ‘‘a shot of adrenaline into the heart of the Kansas economy.’’
Not so, it seems. While the formation of new businesses did jump, many of them were individuals incorporating to take advantage of the 0 percent tax on pass-through income. Meanwhile, state tax revenues plunged; the deficit exploded; and they had to cut spending so severely on education that the Kansas Supreme Court ruled it unconstitutional.
Missouri prides itself in being a low-tax state but it’s not low enough for Sinquefield. He has been pushing Missouri to eliminate its income tax entirely.
Like Sinquefield, Haslag is a Laffer disciple and promoter of the supply-side mantra, certain that the road to the Promised Land is paved with tax cuts. And so, it was a real head scratcher when he found that Missouri’s economy had grown at just half the rate of the country as a whole — an anemic 1.02 percent per year. And even states with no income taxes at all, like Alaska and Tennessee, ranked in the bottom half. While he’s not willing to admit that supply side economics is snake oil, he did state in a recent article that, “The broader message is that lots of factors influence a state’s economic growth rate.”
Ralph Martire, executive director of the non-partisan Center for Tax and Budget Accountability, an Illinois think tank, put it more succinctly: “There’s just no credible evidence anywhere that cutting taxes or low tax rates create an economic competitive advantage. Every peer review study of the issue has shown that there is absolutely no correlation between a state’s tax policy on the one hand and its long-term economic growth on the other hand.”
What is important in Martire’s book, is that a state’s tax structure generate the level of revenues necessary to sustain needed services and to invest in education and infrastructure. Those are the only two areas where investment actually pays economic dividends for states, he says.
“The evidence shows,” said Martire, “that your economy will grow faster, your jobs will grow faster, your median wage and personal income will grow faster than other states if you invest in education — and that is all the way from early childhood on through higher education — and if you invest in infrastructure.”
But many states are taking a, “Damn the facts, full speed ahead,” course. According to the American Legislative Exchange Council, a nonprofit organization of conservative state legislators and private sector parties, “Pro-growth tax reform was a key theme throughout the 2015 legislative session, as many states took steps to improve their economic competitiveness. In this past legislative session, 17 states substantially reduced their tax burdens.”
Maybe they should take a look at that USBEA report before they follow Kansas down the road to Perdition.
Alan J. Ortbals is president and publisher of the Illinois Business Journal. He can be reached at firstname.lastname@example.org or (618) 659-1977.