Income Tax Cuts for the Rich Are a Recipe for Fewer Jobs and Slower Economic Growth

April 4, 2013 by

Legislators are currently considering Governor LePage’s proposed biennial budget that would saddle low- and middle-income Maine families with the tab for a two-year budget gap that’s $433 million bigger than it would have been without large income, estate, and pension tax cuts enacted over the past two years.

These tax cuts are a windfall for the richest families in Maine, but they undermine the state’s ability to make public investments that a strong economy needs: education and training, technology, and transportation.

Unfortunately, based on a careful look at other states that have cut income taxes in recent years, the prospects that Maine’s recent tax cuts will jumpstart the economy and create jobs aren’t that great. In fact, they may be more likely to harm the state’s economy than help it.

A recent Center for Budget and Policy Priorities (CBPP) report shows how states that cut personal income taxes in the 1990s had less economic growth in the subsequent business cycle. Five of the six states with the deepest tax cuts in the 1990s—Colorado, Connecticut, Delaware, Massachusetts, and New York—created fewer jobs and had slower income growth during the period following the implementation of the tax cuts. (New Jersey, the sixth state that enacted deep cuts in the 1990s, raised taxes enough in the 2000s to offset the 1990s tax cuts.)

The problem is that income tax cuts mostly benefit the wealthy, the vast majority of whom do not use the windfall in ways that create jobs. Nationally, only 2.7% of personal income tax payers own a bona fide small business with any employees other than the owner(s). The reality is that most small business owners are not “job creators” and have no plans to be.

Another frequently neglected fact about the relationship between state income tax cuts and job creation is that employee wages are tax-deductible, so income taxes are less likely to prevent hiring in the first place.

When bona fide small businesses do hire more people, they do so because demand for their product or service increases, not because they got an income tax cut. Increased demand for products and services comes from the spending that results from middle class wage growth and a healthy, productive, well-compensated workforce.

Another state-by-state analysis from November 2012 showed that the policy agenda favored by Governor LePage and his supporters—lower taxes and fewer public services—is a recipe for economic stagnation. States that pursue these policies are trailing in economic growth and job growth over the past five years.

It’s easy to cherry pick for comparison two states with different tax structures, but careful studies that look at many states arrive at very different conclusions about the wisdom of slashing public services to pay for tax cuts for the wealthy.

Maine must build its own path to prosperity. A faith-based economic development strategy of cutting taxes for the wealthy and waiting for good-paying jobs to bloom won’t get us there. A sustained commitment to a strategy that invests in our people and our communities will.

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