Listening to KBSX today I heard Rep Marv Hagedorn talking about taxes, and his brilliant plan to lower state income tax by 3% and thereby stimulate the economy and increase overall state revenue. As Humungous said in The Road Warrior, “What a puny plan.”
Hagedorn explained it like this. State lowers income tax by 3%, residents have 3% more money and they’ll spend it, maybe going out to dinner or on their families or whatever, and the state will rake in sales tax revenue from all the spending. Really. That’s how he explained it.
I used to think Hagedorn was fairly smart, but he’s disappointed me with this bit of deep thinking. Let’s look at an example. Person making $50,000. 3% of $50k is $1,500. So after Hagedorn’s tax cuts, this person has $1,500 more to spend.
Assuming that none of it is saved, that the entire $1,500 is spent in Idaho, the 6% sales tax on it would be $90. So, state gives up $1,500 in revenue, gets $90 back.
“I do not think your plan will do what you think it does.”
Also, most of that $1,500 is promptly headed out of state. Where’s that family likely to go to dinner? Applebees, maybe? A national chain. Bye bye in state money. Or, maybe Wal-Mart? Some will be spent locally. Marv would say, I guess, that with all the increased business the stores will hire more employees and raise employment. I suppose some of that will happen, but, how many more checkers will it take at Target if sales go up by 3%? Will they hire more checkers, or will the ones they have just be busier? I just don’t think the state will get its full $1,500 back, much less $1,800 or $2,000.
Hagedorn also said “it’s been proven time and time again” that cutting taxes increases state revenue. No, sorry Marv, just the opposite. You’re offering up supply side economics, just like Reagan and George Bush, and both those guys managed to massively increase the federal deficit without growing the economy. I mean, just look around. Look at the recession we’re in. Bush aggressively cut taxes, and the economy certainly didn’t take off.
Also, how is it possible that when the economy is humming and government revenue is quite high, as in 1999 – 2000, the proper thing to do is cut taxes, yet when the economy is in a recession, as now, the proper thing is to cut taxes?