Once again the American Legislative Exchange Council, or ALEC, is pushing its discredited notion that tax cuts are a potent tool to promote state economic growth. While the preponderance of serious research indicates that cuts to a state’s income tax or its business taxes have little positive effect on a state’s economy, and may well prove harmful to the long term prospects for growth and for increased prosperity, ALEC continues to push its anti-tax anti-government agenda. The latest effort is its State Tax Cut Roundup for the 2015 legislative session.
ALEC lays out in this report its principles of good tax policy, based for the most part on standard economic principles of taxation (transparency, simplicity, neutrality, fairness, reliability, and revenue adequacy), plus the need for balance between state and local governments, and its favorite: pro-growth policies, or economic competitiveness. As in other ALEC reports on tax policy, however, the discussion here is exclusively on ALEC’s notion of pro-growth tax policy — tax cuts of pretty much any variety. It is, after all, the Tax Cut Roundup, but there are no corresponding ALEC reports called the “State Tax Fairness Roundup” or the “State Tax Revenue Adequacy Roundup.”
The recent experience of Kansas should be caution enough against tax cutting as economic policy. For advocates of income tax cutting, Kansas was to be the poster child. Governor Sam Brownback signed legislation in 2012 slashing income taxes and cutting the state budget by over 13 percent. The tax cuts had been pushed by Stephen Moore and by Arthur Laffer, author of ALEC’s Rich States, Poor States, who argued they would provide an “immediate and lasting boost” to the economy. But instead of boosting the economy, Kansas GDP actually declined by 1.1 percent in 2013, the first year of the tax cuts, while nationally GDP grew at 1.3 percent. In 2014, Kansas growth once again lagged the nation, 1.4 percent versus 2.2 percent. Estimates for 2015 show the trend continuing, with state GDP growth expected to be just half of the national rate. Read more.
That the underlying ALEC agenda is to shift taxes from upper to lower income groups becomes clear when one contrasts its statement of tax fairness in the State Tax Cut Roundup with the tax policies ALEC actually favors. The principle stated by ALEC is: “The government should not use the tax system to pick winners and losers in society, or unfairly shift the tax burden onto one class of citizens. The tax system should not be used to punish success or to ‘soak the rich,’ engage in discriminatory or multiple taxation, nor should it be used to bestow special favors on any particular group of taxpayers.”
So how do ALEC’s policy prescriptions stack up against the concept of fairness? A state tax system that did not alter the distribution of income, as ALEC supposedly favors, would be a proportional system: It would take the same percentage of income from every income group. However, most state tax systems are regressive: They take a larger percentage of income from lower income groups, because they are dominated by sales, excise and property taxes, and an income tax generally of only modest progressivity.
Yet ALEC invariably applauds income tax cuts, which would make a state’s system more regressive, moving the state further from the goal of neutrality with respect to income distribution. Apparently shifting taxes from upper to lower income groups is the fair thing to do according to ALEC.