New Study: Lowering Business Taxes May Actually Be Harmful

Printer-friendly versionSend by email

By Sara Flocks

It seems like only yesterday that Texas Governor Rick Perry was bragging about his "hunting trips" to California to steal companies and jobs away from our state. That was at the same time that a delegation of California’s Republican state legislators (and Lt. Governor Gavin Newsom) traveled to Texas to learn why that state had the alleged edge over California on job creation and economic growth.

It was not hard to debunk the fairy tales coming out of Texas about job creation, economic growth and the health of the state economy. It was easy to find data showing that Texas suffers from high unemployment, low-wage jobs and a frightening lack of investment in their children’s education or health care.

But the best rebuttal to Governor Perry's (and any other Governor, ahem, Governor Christie) trash-talking to California is to just be better than their states. And California is coming out on top in terms of job creation and economic recovery. California is now outpacing Texas in job creation.

The question of whether Texas or California has the better strategy for economic recovery is an important one. Texas is the model of a low-tax, no regulations, business first, workers last state. Their taxes are low and so is their investment in public education, health care and middle class jobs. California, on the other hand, is at a crossroads. We can decide to follow the path burned by Texas, or we can continue to make corporations pay their fair share and use that revenue to invest in our infrastructure, public schools and services.

Many of California’s elected officials may urge us to follow the Texas model, at least a little bit. The on-going (and seemingly never-ending) battle to eliminate the Enterprise Zone tax break is just one example of how elected officials, Democrats and Republicans, shy away from any perceived tax increase on business. The inability of the Legislature to eliminate a failed corporate tax break goes to show that California has not yet let go of the mantra that raising taxes is a "job-killer."

A recent study published by academics at Harvard and Texas A&M University may have the answer to what path California should take. The study is one of the most comprehensive ever done looking at the connection between state business taxes and economic growth and business decisions. The authors looked at all 50 states between 1977 and 2005.

What did these esteemed academics (from Texas, no less!) find? Well, they begin by citing a study from 2002 on business tax incentives to set the stage. The study found "surprising evidence that incentives to businesses lead to a substantial increase in the number of jobs a business announces that it will create, but no difference in the actual number of jobs created."

Wow, that sounds familiar! Didn't VWR, a formerly union company that moved to an Enterprise Zone for tax breaks, say the same thing about all the jobs they would create?

The academics' own exhaustive research found similarly surprising (for them) results. They state that:

Contrary to expectations, business taxation shows a significant positive relationship with the growth rate of Gross State Product (GSP), implying that lowering business taxes may actually be harmful to the overall state economy. With countless state policy makers enacting legislation that does just this, these findings should elicit some concerns. These states intend for these lower business taxes to entice businesses to locate in that state and spur the economy. Rather than boosting the economy as expected, in reality these policies have been associated with a decrease in the growth rate of GSP and resultantly economic decline.

What the academics are saying in 71 long pages filled with data, is what we have known all along. Cutting taxes for corporations is not necessarily a good thing for our state. We need that tax revenue to fund all of the great things our state does, including things like infrastructure, schools and job training that benefit business as well.

In fact, the authors of the study go on to say:

Policy-makers can most effectively and efficiently stimulate economic growth through increased spending on elementary and secondary education as well as on infrastructure.

California Labor has a strategy to put the state on the road to economic recovery, which is very much in line with the academics' findings. The Labor Federation produced a strategy entitled "Invest in California: California’s Plan for Good Jobs" that outlines six planks of a comprehensive economic recovery strategy to create good, middle class jobs, increase revenue and invest in manufacturing and infrastructure to make our state great again.

The path forward is clear. Now is the time to start walking.

Sara Flocks is Public Policy Coordinator for the California Labor Federation, which represents more than 2 million union members in manufacturing, retail, construction, hospitality, public sector, health care, entertainment and other industries in the state of California. This article was originally published at Labor's Edge.