Many citizens suspect that their elected representatives and bureaucrats live in an entirely different world than they do. Further confirming their suspicions, evidence has emerged once again in Harrisburg that some state officials have forgotten who owns what in our commonwealth.
Nowhere is this disconnect with reality more evident than in the burgeoning debate over two Republican-sponsored tax cut bills. One bill would reduce Pennsylvania’s Corporate Net Income tax rate from 9.99 percent—the 3rd-highest such rate in the nation—to 6.99 percent by 2010. The other would reduce the state’s Capital Stock and Franchise tax—the 2nd-highest such rate in the nation—by 3 mills in the coming year and return its twice-delayed phase-out to its original schedule.
In the world most Pennsylvanians inhabit, the intent of these bills is clear—to reduce the cost of doing business in Pennsylvania. But in the Harrisburg parallel universe, these bills don’t reduce costs: They increase them.
How can this be? It’s all a matter of perspective, and the answer can be found in the recent comments of Revenue Secretary Greg Fajt and the two top Democrats in the state House of Representatives.
Secretary Fajt: “These bills merely cut taxes without regard to how the lost revenues are to be replaced.”
House Minority Leader Bill DeWeese: “They offer no way to pay for these multi-million dollar, big-business tax incentives.”
House Minority Whip Mike Veon: “(The governor) cautioned that tax cuts should not be made without the revenue to pay for them.”
What is the common thread weaving the three preceding statements together? Simply put, all three of these officials—and doubtless many of their colleagues on both sides of the aisle—think that tax revenues belong to state government, not the people who earned the money to pay them. This view, then, considers any reduction in tax revenue as a “cost” to government that must be offset, not by reducing spending, but by increasing other taxes.
The reality, of course, is that state government has no money of its own, and the only way it can spend money on one citizen is to first take it from another. Tax cuts, on the other hand, are not spending—because a reduction in taxes simply allows more money to remain in private hands to be spent and invested as individual Pennsylvanians choose.
Indeed, tax cuts effectively shift power away from government and to individuals, families, and businesses. And it is this dynamic that causes some politicians to try to paint them as “costs.” But the evidence across the nation reveals that tax cuts are not costs at all, but “investments” in economic growth and prosperity.
The Cato Institute’s March 2005 study, Fiscal Policy Report Card on America’s Governors: 2004, examined the 10 states that raised taxes the most between 1990 and 2002 and compared their economic performance with that of the 10 states that cut taxes the most during the same time period. The conclusion is that when states reduce taxes, they improve their relative economic performance. For example:
- Job growth in the top 10 tax-cutting states was 10.3 percent above the national average between 1990 and 2002. The corresponding employment growth rate in the top 10 tax-hiking states was 21.1 percent below the national average.
- Personal income growth in the top 10 tax-cutting states was 6.1 percent above the national average between 1990 and 2002. The corresponding personal income growth rate for the top 10 tax-hiking states was 9.1 percent below the national average.
- Population growth in the top 10 tax-cutting states was 9.3 percent above the national average between 1990 and 2002. The corresponding population growth rate for the top 10 tax-hiking states was 10.1 percent below the national average.
- Bond ratings of the top 10 tax-cutting states improved more during the 1990s than those of the top 10 tax-hiking states. The average 2002 Standard and Poor’s bond rating of the tax-cutting states was between AAA and AA; the average 2002 Standard and Poor’s bond rating for the tax-hiking states was between AA and A.
Living in a parallel universe might be fun for a while—but sooner or later, reality is bound to intrude. So instead of bemoaning the “cost” of tax cuts in Pennsylvania, it is time our policymakers started “investing” in them.
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Grant R. Gulibon is senior policy analyst with the Commonwealth Foundation, an independent, non-profit research and educational institute located at the foot of the Capitol in Harrisburg.