Why, and How, Tax Cuts Really Do Work
TUCKER, WILLIAM
Why, and How, Tax Cuts Really Do Work By William Tucker Forget Iran, forget tobacco, forget abortion. The presidential election is being fought over the idea of a 15 percent across-the-board...
...Any tax increase that puts spending over the limit requires voter approval...
...Arizona’s Medicaid expenses are only $390 per recipient, as opposed to a national average of $3,080, even though it has a large and politically active elderly population...
...As economic activity surged and tax receipts ran ahead of predictions, tax rates were cut once again—a strategy that has been pursued by every tax-cutting governor...
...But is there anything speculative about the effects of cutting taxes...
...Polls show that a majority believes Dole’s proposal is “just a political ploy” (although even here it is obvious the pollsters are loading the question...
...This is why unemployment rates between a high-tax state like New York and a low-tax state like Texas rarely differ by more than a few percentage points...
...It is now continued in only 15 states...
...Arizona’s Proposition 108, adopted by a 72 percent majority, requires a two-thirds majority in both houses of the state legislature to pass any new measure that will increase taxes or general revenues...
...At the time, our deficit was the equivalent of a $200 billion deficit at the federal level—about what we’re facing now in Washington,” says Weld...
...The population of Detroit—once the fourth largest city in America—slipped below 1 million for the first time since the 1920s...
...The general upwelling of populist revolt against runaway government spending and taxation has now washed up on Washington’s doorstep...
...Most governors also have a line-item veto, and many state governments are now regulated by a remarkable series of citizens’ initiatives against taxes and spending...
...During Symington’s tenure, jobs, business creation, and population have grown at three times the national average...
...Medicaid spending— an area where states still have a great deal of latitude— has been brought under control without harming anyone...
...The results have been nothing short of spectacular...
...Under Democratic governor Bruce Sundlun, state spending grew almost 10 percent a year from 1990 to 1994...
...Richard Vedder, who has studied such population movements from the past 15 years, finds that migration has almost inevitably been from high-tax states to low-tax states...
...How Washington Can Do It So why can’t any of this be applied at the federal level...
...The figures on population growth and loss are worth noting because economists are coming to recognize them as a key indicator of a state’s economic health...
...In the last six years, half a dozen states have carried out ruthlessly aggressive taxcutting programs, mostly under Republican governors...
...And let us not fail to appreciate, for the moment, this new Democratic conversion to fiscal responsibility...
...Every penny saved to a taxpayer would have to be spent in some institution of learning...
...The governors have several important tools at their disposal to achieve this...
...Across the state, slanted newspaper, magazine, and television editorials accused Michigan Republicans of trying to help the rich at the expense of the poor and middle class,” he recalls...
...Adopted in 1978, the year of Prop...
...In 1995, the legislature—still controlled by Democrats—did what might seem impossible and lowered tax rates exclusively for people in the upper brackets...
...In 1990, John Engler, the majority leader of the state senate, was elected governor on a program of reducing taxes...
...Rather than using tax cuts simply as a one-time “stimulus,” Engler has directed an overall plan toward downsizing government on a broad front...
...Lowtax states are continuously creating more jobs while high-tax states are constantly losing them...
...New investment went into small, hightech firms specializing in software and engineering services...
...Yet service is actually better...
...Once again, the overall economic climate of high taxes and low job creation will make it difficult...
...What Happens When Taxes Are Raised But perhaps these states are simply riding the wave of a national economic recovery that has reduced levels of unemployment...
...The obvious answer is that it can...
...In effect, this means that about 500 people a day leave the eight high-tax states and 1,000 people a day arrive in the nine low-tax...
...When Republican governor Pete Wilson took office in 1991, he and the Democratic state legislature faced a mind-boggling $14 billion two-year deficit that was being rolled over through short-term loans, making a mockery of the constitutional requirement for a balanced budget...
...But he now recognizes that job creation may be a more important factor...
...Lawrence Katz of Harvard and Olivier Blanchard of MIT have reached the same conclusion...
...The Small Business Survival Committee ranks the state dead last in its index of business climates...
...Next year he will introduce “renaissance zones,” an extension of enterprise zones, in which both people and businesses who move into dilapidated neighborhoods will pay no state or local taxes for fifteen years...
...The national press kept a tight lid on this story and it actually played little role in Dukakis’s electoral defeat...
...Prop...
...When 1996 tax collections ran $200 million ahead of projections, Weld announced the surplus would be refunded to taxpayers through a temporary increase in the personal exemption...
...Massachusetts has experienced an enormous economic resurgence...
...Bob Dole, although a late convert, has obviously grasped the significance of these developments...
...He can also have a balanced-budget amendment anytime he wants it...
...A state that had been almost entirely dependent upon the auto industry for 75 years began to diversify...
...Figuring the new revenues would close the gap, the state didn’t bother to curtail spending...
...The president who takes office in 1997 will be the first chief executive in history with a line-item veto...
...Under Democratic governor Gaston Caperton, elected in 1988, state spending has increased 60 percent, or $3,000 per year for a family of four...
...The national recession, which officially ended in 1991 nationwide, stretched out into 1993 in California...
...Completely chastened by the 1991 experience, Wilson has now proposed an across-the-board income-tax reduction for all California residents of—you guessed it—15 percent...
...Any tax or fee increase requires voter approval...
...The state’s 9 percent corporate income tax is among the nation’s highest...
...Unemployment fell from 9.6 percent in July 1991, to 4.5 percent in July 1996...
...The state’s rainy-day fund, depleted to under $200 million in 1990, is back over $1 billion...
...attorney for Massachusetts, was elected governor on the platform “Tough on Taxes, Tough on Crime...
...Engler is improving the state’s education program with the nation’s most ambitious charter-school program—40 new schools in the last three years...
...Arizona is another state riding on a wave of expansion spurred by tax reduction...
...Capital-gains and real-estate taxes have also been slashed...
...President Clinton has been portraying Bob Dole’s taxcut proposal as pie-in-the-sky, bet-the-farm politics, and for now, the electorate seems to have accepted this diagnosis...
...In fact, lowering tax rates does not lower revenues...
...The Michigan Manual— the state’s official guide—didn’t even list it as part of the state constitution for more than a decade...
...Whereas over 500,000 jobs had left New Jersey under Florio’s administration, 140,000 new jobs have been created since Whitman took office, outpacing growth in neighboring northeastern states...
...We’ve transferred Medicaid to a managed-care format that has saved the state an enormous amount of money,” says Weld...
...Instead, it established “ACCESS” (Arizona Health Care Cost Containment System) in 1982, which operates entirely on managed care and has proved far more efficient...
...Our labor markets tend to clear,” says Vedder...
...Instead, the budget increased 10 percent...
...The auto industry projects they will need 100,000 new workers over the next few years to meet their job growth,” says John Truscott, spokesman for the governor’s office...
...Deficits disappear, credit-rating agencies voice enthusiasm, surpluses pile up...
...In a 1992 study for the Brookings Institution, they found that unemployment in individual states has rarely exceeded the national average for long...
...Spared from shrill accusations of wanting to see the elderly die, governors and legislatures have found they can actually improve service while keeping spending within bounds...
...16 issue...
...A student of Russell Kirk and Ludwig von Mises, he had very clear ideas about reducing the scope of taxation and government...
...When people migrate, it’s often in search of jobs...
...There will probably be a lot of new in-migration...
...All that will be required, of course, is the will—and here the candidates differ...
...But what if someone wants to quit school to start a business—as Bill Gates, Steven Jobs, Marc Andreessen, and so many other entrepreneurs of the information age have done...
...That is no longer a problem...
...Despite a constant stream of federal largess, the state’s unemployment rate is chronically at recession levels...
...Economic activity declined and the tax increase fell $5.9 billion short...
...It’s one of the reasons we have a dynamic economy...
...Of the 20 counties around the country with the highest concentration of Internet host computers, two are now in Michigan...
...In 1995, Michigan returned $113 million to taxpayers in the form of a 2 percent deduction on their income taxes...
...Second, they are designed almost exclusively to steer people into education—which just happens to be the home of the teachers’ unions, public-sector unions, and professorial bargaining associations that are the backbone of the Democratic party...
...When Democrats in the legislature abolished the property tax for school funding, Engler took up the challenge and transferred funding to a smaller sales tax...
...Yet the anticipated revenues never materialized...
...Medicaid spending was increasing on an average of 20 percent every year...
...Conceived by Richard Headlee, a Farmington Hills insurance executive, and written in part by Milton Friedman, the Headlee amendment limited state spending—but also prevented the state from mandating spending by local governments...
...Nor are these patterns irreversible...
...Only when Wilson reversed course and rescinded most of the tax increases of 1991 did the state’s economy begin to revive...
...In every state the outcome is routinely described as a “miracle...
...In reality, job creation takes off, broadening the tax base...
...Since it was anticipated that the supplyside effect of tax cuts would take two years to kick in, he began cutting spending as well...
...Elected in 1991, Fife Symington has run a tax-cutting regime in which he has eliminated $1.5 billion in theoretical revenues, mostly from chopping personal and business taxes...
...Even as he ran for president, the governor was rifling pension funds and presiding over a ballooning deficit...
...In an era of environmental dogma, when local communities often regard growth as a negative and population loss as a virtual blessing, the migration of American workers from state to state, community to community, has passed almost unnoticed as an increasingly accurate barometer of business climates...
...Yet despite the reduction in tax rates, total receipts have risen in all three subsequent years...
...But it did nothing to limit state spending...
...The state was reeling from the consequences of a bogus miracle, engineered by 1988 Democratic presidential candidate Michael Dukakis...
...These are, of course, three of the ten planks of the Contract with America...
...Weld immediately cut tax rates across the board, accompanied by government downsizing...
...Michigan now sees its major problem as finding enough workers to fill jobs in its booming economy...
...On tax cuts, however, the president is still playing the old game of manipulating the economy through “incentives...
...In 1994, Engler was reelected with 62 percent of the vote, the highest margin of any Republican governor in the state’s history...
...An inverse supply-side effect took hold...
...The Democratic response to Dole’s proposed 15 percent acrosstheboard tax cut is that it will “blow a hole in the deficit...
...California’s rate, by contrast, is 8 percent and New Mexico’s 7.1 percent...
...If you look at the eight states that taxed personal income at more than 3 percent in 1993, you find a net out-migration of 789,000 from 1990 to 1994,” says Vedder...
...Anybody who thinks we can’t use the line-item veto to deliver these tax cuts with a balanced budget doesn’t know Jack Kemp and Bob Dole,” he has said...
...It doesn’t belong to the government, it belongs to taxpayers...
...This creates budget surpluses, which embolden governors and legislatures to slash tax rates even further, compounding growth once again...
...In 1991, he signed an agreement for a historic $8.3 billion increase, or $1,081 annually for the average family of four...
...First and foremost, Clinton’s tax cuts are the latest version of Stanley Greenberg’s holy grail (or “killer app” in modern terminology), that elusive middle-class entitlement that will forever bind the average working-age American to the government the same way the elderly and the poor have already been taken into the fold...
...Even newly elected Republican governor Lincoln Almond has been unable to stem the tide...
...Bill Clinton, on the other hand, is still stumbling around in the dark...
...His stated purpose is to eliminate the income tax altogether—although that goal is cloudy now, as Symington has become entangled in ethical problems...
...Most states operate under the constitutional requirement of a balanced budget...
...They “are fully paid for in my balanced budget plan, line by line, dime by dime . . . and they focus on education...
...The state that once symbolized industrial America was in free fall...
...Every tax cut I call for tonight is targeted,” he said...
...His biggest move was to eliminate General Assistance, a form of welfare made available to able-bodied adults that cost the state $225 million a year...
...For the first time since 1849, California began losing population—over a million people from 1990 to 1995...
...This year he became the first Rhode Island governor in history to veto a state budget when he turned down a $1.7 billion outlay for “a government we can’t afford...
...At the same time, the governor has made sure that spending responsibilities were not simply mandated to lower levels of government...
...Engler was no simple business-oriented conservative...
...He has cut taxes 21 times, for theoretical tax reductions totaling $3.6 billion since 1991...
...Senate seat held by John Kerry...
...When you look at the nine states that tax at zero to 1 percent, you find an in-migration of 1,396,000—exclusive of foreign immigration...
...After coming from 30 points behind to win, Whitman fulfilled her promise in two years...
...Driving them has been the populist movement for reduction in government that began with California’s Proposition 13 and has since become much more refined and sophisticated...
...Yet the reduction in the growth of state revenues has not forced municipalities into undue increases in property taxes...
...In four years we’ve gone from a $2 billion deficit to a $320 million surplus,” says Weld, who is now running for the U.S...
...If we had a European-style labor force, where workers did not move readily from region to region, states such as New York and Rhode Island might easily have unemployment rates of 20 percent, while Texas, Michigan, and Arizona would be importing “guest” workers...
...The state has a 7.7 percent marginal tax rate on the median income, a 7 percent state sales tax (highest in the nation), and a 9 percent corporate income tax (second highest in the nation...
...There certainly are...
...In addition to reducing income-tax rates, Engler made it clear that the state’s entire attitude toward business would be changing...
...The deteriorating business climate, along with the Los Angeles riots, drove people from the state...
...Or what if they just want to start a landscaping business or a bowling alley or a laundromat—or marry their pregnant girlfriend and start bringing home a paycheck...
...We have a very mobile work force—much more mobile than in Europe,” says Katz...
...Already fiscally conservative, Arizona is the only state that refused to set up a Medicaid program when the federal enabling legislation was adopted in 1968...
...We’re not just adding jobs,” says Engler, “we’re adding good jobs...
...He was promptly overridden by a legislature in which Democrats hold a 5-to-1 majority...
...But in Michigan we have tried them and we know this: Tax cuts not only work, they work wonders...
...They failed to mention that one of their patron saints, President John F. Kennedy, supported tax cuts because, he said, ‘a rising tide lifts all boats.’” Engler began with an immediate reduction of the income-tax rate...
...We didn’t get from there to here with penny-ante, targeted tax cuts...
...A state health plan, meant to be a model for a national effort, collapsed in disarray...
...One in seven people in Detroit was on AFDC...
...13 simply put limits on local property taxes, which made it immediately popular with voters...
...Washington’s Initiative 601 limits the growth in state spending to inflation and population growth...
...General Assistance, or “Home Relief,” was the one state welfare program that was not transferred to federal funding by the 1936 Social Security Act...
...The overall result has been exactly what is intended—a shrinking public sector and corollary growth of the private sector...
...We closed all the exits,” says Headlee...
...Over 200,000 new jobs have been created in the process...
...Caught between a national recession and a slumping auto industry, the government was running a $1.8 billion deficit...
...He defeated two-term incumbent governor Jim Blanchard, who ran on a program of raising taxes...
...The state has lost 6.5 percent of its jobs in the past five years and has suffered the largest percentage population loss of any of the 50 states...
...Using his lineitem veto (a tool possessed by 36 of the nation’s 50 governors), plus executive orders, Engler trimmed $2 billion out of the 1992 budget, closing the deficit...
...The Michigan Story In 1990, Michigan, like many other states, was in an economic crisis...
...Whether these attitudes finally penetrate Congress and the White House is what this election is really about...
...He reformed medical liability and straightened out environmental regulations that were discouraging the redevelopment of urban industrial sites...
...Tax rates were cut 30 percent on incomes under $40,000 and slightly less in the higher brackets...
...Unemployment, which had been above the national average since 1978, fell below the national average in January 1994...
...Almost immediately, the Michigan economy responded...
...Altogether, Weld has cut taxes rates 15 times, for theoretical savings to taxpayers of $1 billion...
...Running in 1993 against the Democratic incumbent, James Florio, who had imposed the largest tax increase in the state’s history, Whitman promised to reduce income taxes 30 percent in her first three years of office...
...Clinton only wants “targeted” tax cuts, which have nothing to do with giving power back to the people and everything to do with micromanaging from Washington...
...Total personal income increased from $136 billion to $171 billion over the same period, growing at 6 percent in each of the last two years...
...13, it was much more carefully conceived...
...Only when Engler took office did he turn Headlee into the powerful budget-controlling tool it has become...
...Take Michigan’s Headlee Amendment...
...His acceptance speech actually cited three budget-making reforms—the line-item veto, the ban on unfunded mandates, and the application of federal laws to Congress—as major accomplishments of his administration...
...That would complete the repertoire that has given the governors such enormous control over their state finances...
...Ballot initiatives have now passed through an entire second generation, in which the restrictions on taxing and spending have been much more carefully drawn: ¶Colorado’s Amendment 1 limits state spending by a formula tied to inflation and population growth...
...Nor is there carnage among the elderly or armies of children thrown into the streets...
...The state was rapidly turning into a welfare mecca...
...Rhode Island is another state whose one-party Democratic rule has put it into a seemingly endless recession...
...Here’s how things have gone in several states...
...Our tax cuts are returning money back to our citizens’ pockets,” says Whitman...
...What has been missing at the federal level to this point are the tools to handle the budget...
...And that’s precisely the point...
...Are there any counterexamples that show a negative impact from raising taxes...
...Whitman’s Sampler, and Playing the Fife New Jersey’s Christie Whitman has had an equally dramatic success...
...West Virginia is a state that has suffered a prolonged, seemingly endless recession, because of higher taxes...
...After the election, however, state residents were left living in what the Boston Globe described as a “fiscal Beirut...
...Since the collapse of the Rust Belt in the 1980s, the state had lost population...
...Hardly...
...California is the prime case...
...Arizona has ranked among the top five states in job growth for the past four years and in 1995 was first in the nation...
...He also eliminated the inheritance tax, which fell heavily on family farms and small businesses...
...Rhode Island is an incestuous, one-party mix of Democratic legislators and powerful public-sector labor unions,” says Stephen Moore, director of fiscal policy studies at the Cato Institute and author of its annual “Fiscal Report Card on America’s Governors...
...He set up the Office of Regulatory Reform and eliminated over 2,000 obsolete and burdensome regulations...
...Ruled by Democrats since the Civil War, the state’s main source of enterprise in recent decades has been federal projects brought in by former Senate majority leader Robert Byrd...
...From 1991 to 1996, the marginal rate on the median income was reduced from 6.25 percent to 5.95 percent...
...Without job creation, “targeted” tax cuts are likely to produce little more than a European-style population of perpetual graduate students—or a souped-up version of the “job-training” treadmill that has engulfed so many welfare recipients...
...We think there’s a lot of things we could teach the federal government on this score...
...What defined their success was the perception that tax reduction, combined with aggressive spending cuts, was the way to overcome these deficits...
...Yet the amendment lay dormant for more than a decade, ignored by Michigan officials whose only reaction to the amendment was to oppose taxpayer groups that tried to have it enforced...
...When a governor claims to have “saved taxpayers $1 billion,” he or she is applying the lowered rate to the old, sluggish economy...
...Yet under the Headlee Amendment, a ballotinitiative tax reform adopted in 1978, the state is not allowed to retain further surpluses...
...The state continued to borrow, doubling its debt and losing its AAA credit rating in the process...
...Everyone is soon stunned to realize that, even though rates are lower, revenues still grow...
...For starters, Dukakis imposed a $1 billion emergency tax increase to try to stem the damage...
...CLINTON WANTS “TARGETED” TAX CUTS, WHICH HAVE NOTHING TO DO WITH GIVING POWER BACK TO THE PEOPLE AND EVERYTHING TO DO WITH MICROMANAGING FROM WASHINGTON...
...Since 1991, employment has climbed by 500,000, and in 1995, one out of every five new manufacturing jobs in America was created in Michigan...
...William Tucker’s cover story on George Pataki appeared in our Sept...
...But it also tends to mask the tremendous difference between state economic policies...
...New Jersey is unique in that 90 percent of the state’s income-tax revenues are passed through the local communities to pay for schools...
...The Michigan experience has shown that a population-losing, hightax state can quickly reverse job and population losses if it cuts taxes and reduces government spending...
...Vedder at first attributed this to a desire of individuals to pay lower taxes and keep more of their salaries...
...The gospel of reducing taxes and downsizing government is almost unknown...
...Caperton extended the state’s 6 percent sales tax to include food (a $400 million revenue increase) and raised the state’s gas tax by 10 cents per gallon...
...He began phasing out Michigan’s intangibles tax, the equivalent of a capitalgains tax...
...The Republican governor also supported a state ballot initiative that requires a supermajority of two-thirds of the legislature to adopt tax increases...
...Wilson, acting more like a liberal Democrat, persuaded the legislature to overcome a two-thirds-majority requirement and raise taxes...
...The presidential election is being fought over the idea of a 15 percent across-the-board tax cut...
...IF WE HAD A EUROPEAN-STYLE LABOR FORCE, STATES SUCH AS NEW YORK AND RHODE ISLAND MIGHT EASILY HAVE UNEMPLOYMENT RATES OF 20 PERCENT...
...Right now we don’t know how we’re going to meet that demand...
...In short, anything and everything that has been devised to reduce government and throw responsibility back onto the private sector and private individuals is being tried in Michigan—with spectacular results...
...In his first two years, state spending declined, even without accounting for inflation, despite Democratic control of both houses of the state legislature...
...The Real Massachusetts Miracle Massachusetts was in a situation similar to Michigan’s back in 1990...
...Manufacturing jobs cuts were projected as far as the eye could see...
...Yet because of the supply-side effect, tax revenues have actually moved ahead at 5 percent per year...
...Taxes: What the Voters Say All these changes have not come in a vacuum...
...People don’t often move across the country just to pay lower taxes, but they will move across the country to find a job,” says Vedder...
...Out-migration is slowing and California has finally started to grow again...
...Oklahoma’s State Question 640, adopted in 1992, requires that any legislation introduced to raise taxes pass by three-fourths majorities of both houses or by voter referendum...
...Instead, people are constantly migrating out of lowemployment states into states where jobs are available...
...In an additional effort to minimize property taxes, Whitman persuaded the legislature to adopt a constitutional amendment forbidding the state to impose unfunded mandates on local communities...
...If tax collections exceed expectations, the surplus must be returned to taxpayers—the reason for the 2 percent rebate in 1995...
...Yet every Republican governor who has jump-started his state’s economy has been in the same deficit position...
...Personal income has also climbed 25.9 percent, the fastest growth in the nation...
...Nonetheless, tax revenues have been consistently higher than expectations and the state ended fiscal 1996 with a $750 million surplus...
...The marginal rate on the median income is now 4.2 percent, down from 5.25 percent...
...In 1990, William Weld, a former U.S...
...Ever since the Reagan Revolution, liberal journalists, economists, and politicians have tried to convince Americans that tax cuts are ‘wacky’ and doomed to failure,” Engler says...
...In attempting to turn Massachusetts into a model welfare state, Dukakis had nearly spent his state into bankruptcy...
...A study by Timothy Goodspeed and Peter Salins found that New Jersey residents were paying only 22 cents in increased property taxes for every dollar saved in state income taxes...
Vol. 2 • September 1996 • No. 3
