Tax cuts brought LA real economic benefits

As we have come to expect from the left, caricature and oversimplification make for lots of red meat thrown to the unthinking masses, but it’s a lousy method for valid understanding of public policy ramifications.

Just such as example comes from a leftist opinion writer named David Leonhardt on the pages of the New York Times. In a recent piece, he attempted to use Louisiana’s income tax cutting during the former Gov. Bobby Jindal years as an indictment against that option, alleging that promises that “tax cuts would lead to an economic boom” didn’t pan out and produced the state’s budgetary difficulty.

Such a view has both theoretical and empirical difficulties. Liberals almost always misunderstand, if not intentionally misstate, the role that tax cuts have on public finance. What now popularly is called the Laffer Curve argues that, past a certain point, punitive tax collections discourage economic growth by providing incentives for tax avoidance and stunted economic growth. Especially when dealing with such low rates relatively speaking – Louisiana’s top individual rate of 6 percent is about 15 percent of the highest federal rate – chances are state rates don’t make it to the right side of the curve; i.e. where they lower revenue by going higher.

Thus, state tax cuts almost always, in the short run, will bring in less revenue for government. However, this effect will be distorted by national factors – tax policy and the economy; keep in mind that Louisiana represents fewer than 2 percent both of national economic output and overall governmental spending. For example, if a state cuts income taxes now, right after the federal government did, for almost all the impact of additional dollars kept in-state and put to economic use would mitigate, if not completely swamp, lost revenue from state tax cuts on the same.

Finally, insofar as budgeting goes, the spending side plays a role for states when implementing a tax-cutting strategy. At the federal level, cuts produce a revenue hit, but that may have no impact on budget-writing if government decides to increase deficit spending. But, except for Vermont, states must produce balanced budgets.

This imperative makes two related things relevant to assessing tax policy. First, economic growth from tax cuts doesn’t occur instantly but builds over time; even a couple of years after the fact is too soon to expect higher revenues organically produced through increased economic activity, Second, unless a state has an alternative source of revenue come online, because of this in the few years after tax cuts it must practice spending restraint while waiting on the inevitable growth to occur and its fruit deposited in state coffers.

So, to understand whether “tax cuts … lead to an economic boom” in Louisiana, we have to measure indicators of economic success, revenue figures, and judge how the state handled spending matters to bridge to the day growth triggered by the cuts becomes substantial – not just look at whether revenues have kept up with expenditures. Data from the beginning of 2005 – eight months before the hurricane disasters struck – and the end of fiscal year 2015 – right before two consecutive years of huge tax increases went into effect – can assess the question.

Keep in mind this period incorporates (in order of occurrence) rapid growth of a major Louisiana industry, energy, through shale exploration; a bonus from heavy federal recovery spending; a national recession followed by a near-nonexistent recovery; and record energy prices followed by a collapse that bottomed just after the end of this span. Minor tax cutting began in 2007 and followed in 2008, but 2009 produced major slashing of individual income tax rates, with tinkering of exemptions following for the remainder of the time.

Looking at two measures of economic health mainly reflective of the private sector, at the start of 2005 among the states Louisiana ranked 42^nd in per capita income and 39^th in per capita gross domestic product. By 2015, the results were 33^rd and 31^st, respectively. Over that span, income increased 46 percent while private sector productivity rose 33 percent, compared to the U.S. overall with increases, respectively, of 43 percent and 39 percent.

To sum up, in part as a result of those tax cuts Louisiana had an “economic boom” relative to other states and performed on par with the country as a whole. And as far as the state revenue picture went, in 2009 when the major cuts were enacted, it took in just over $3 billion in individual income tax revenues and almost $600 million on the corporate side, while by 2015 right before two consecutive years of major tax increases it took $2.9 billion from households and about $375 million from corporations.

In other words, over those six years government’s take of revenue decline by just over $300 million, or around 8 percent. Problem was, per capita state dollars spent by government continued to rise, increasing almost 6 percent over the decade instead of falling.

The reason why the state has had problems balancing its budget is not from too few revenues caused by tax cuts; in fact, in FY 2010 the cuts entirely were “paid for” by the spending practices of Jindal. The reason why Louisiana has had a problem is lack of spending restraint since then, as even though per capita state dollar spending fell by 1.6 percent from 2005 to 2010, it surged 24.6 percent from 2010 to 2015.

In short, and as is typical, when putting the left’s allegations about economic policy to an empirical test, they fail. If given a choice of keeping more of what I earn and seeing Louisiana receive $300 million less in income tax revenue in the sixth year after the fact that pares a bloated state government ranking 21^st among the state in per capita state dollars spent in 2005, I’ll take it.

Yes, if not a boom, Louisiana did enjoy positive economic benefits from tax-cutting over the past decade, and certainly not the disaster the article’s rather ignorant author implied. And if, as Leonhardt believes, the state as a result has “struggling schools, hospitals and other services,” it’s because of poor spending choices diverting too much money to needless pursuits. Not, of course, that he would let the facts interfere with his ideology.