By Joe Cortright of Portland, Oregon. Joe is the president and principal economist at Impresa, a consulting firm specializing in regional economic analysis. He's also a senior non-resident fellow of the Brookings Institution and chief economic analyst for the Oregon Business Plan.
Opponents of Measures 66-67 are repeating their focus-group tested claim that Oregonians should vote against those “job killing” taxes.
Evidence for supposed economic lethality of these measures comes from three economists Randy Pozdena, Eric Fruits and Bill Conerly, (PFC) who have reviewed the economic literature, presented their own statistical results, and claim that tens of thousands of jobs will be lost.
But neither the economic literature nor the data support their claims. A wide series of independent reviewers have debunked key parts PFC’s arguments.
To begin with, Pozdena, Fruits and Conerly are simply wrong in their interpretation of the economics literature about taxes and economic growth.
A careful reading of the economic literature shows that many factors influence economic growth at the state level, and public finance is a relatively minor influence. All else equal, taxes have a weak negative effect on growth, almost all of which is offset, or more than offset by the positive effects of higher public spending, on things like education and infrastructure, which benefit the economy. Consider three of the major authorities cited by PFC who essentially reach the opposite conclusion from what PFC claim:
- The Organization for Economic Cooperation and Development study (which PFC claim supports them) concludes: “Empirical evidence for the hypothesis that the level of taxation affects economic growth is very weak.”
- Wayslenko concludes: “Taxes do not appear to have a substantial effect on economic activity among states.”
- Bartik concludes, although business taxes have some effect on economic development, the size of the effect is modest … the quality of a state’s roads and education system are at least as important as the state’s business tax system in determining long-run economic development.”
In addition, each of the statistical assertions made by PFC is wrong, or simply inapplicable to Oregon’s current situation.
Pozdena claims higher corporate taxes will reduce job growth. His statistical analysis of the effect of corporate tax rates on economic growth was drawn from an international study that included less developed countries. Not only is the international comparison questionable, but excluding these very poor countries from the analysis eliminates the negative effects associated with taxes. And because Oregon’s corporate income tax, and Measure 67’s gross receipts taxes are based solely on Oregon sales, Pozdena’s evidence doesn’t apply. The Brookings Institution’s tax policy experts reviewed the Pozdena study and concluded “cross-country studies say nothing about how apportioned taxes affect economic growth and thus are not applicable.”
Conerly claims higher income taxes result in lower rates of job growth. Looking at 27 years of data on employment change and tax levels in 50 US states, Conerly observes a negative relationship between tax levels and employment growth. In years when taxes are high, job growth is low, and vice versa. He assumes that high taxes “cause” lower job growth. But it’s clear that the causality runs the other direction—because states have to balance their budgets each year, they frequently raise taxes when the economy grows slowly, and cut taxes when times are good. That is exactly the historical case in Oregon, when the state imposed a surcharge on its income tax in the early 1980s to make up for a big revenue shortfall. So Conerly may have the facts right, but the interpretation 180 degrees wrong. (The phases of the moon are correlated with tides, but tides do not cause the moon).
Fruits and Pozdena claim that high income taxes prompt wealthy, entrepreneurial households to leave the state. But the study they cite (Kolko 2009), looking at California, concludes just the opposite: high income households are less likely to move, and that low income households are more likely to move to states with low or no income taxes than are high income households.
But even if one accepts that in some theoretical sense, there may be some negative effects associated with higher taxes, as a practical matter, in today’s economic climate we find ourselves in today, the alternative—deep cuts to public services and spending—would be even worse. (And keep in mind, PFC implicitly assume that Oregon is the only state faced with raising taxes—when in fact every other state is in a similar, or worse bind, so that Oregon is not putting itself at a competitive disadvantage).
Other economists who have carefully examined the PFC arguments in light of the current economic situation, have found them wanting, and reached the opposite conclusion about the merits of Measures 66 and 67.
Ed Whitelaw and Bryce Ward of ECONorthwest and the University of Oregon note much if not all of the negative effects of higher taxes would be offset by the economic benefits of avoiding layoffs and public services cuts.
University of Oregon economist and nationally recognized blogger Mark Thoma notes that because budget cuts will cost the state federal matching money, cutting services could cost even more jobs than tax increases.
Oregon State University Economist Bill Jaeger writes in the Eugene Register Guard that even with the proposed Measure 66 and 67 tax increases, Oregon’s overall tax burden and its burden of business taxation will be among the lowest in the nation.
In sum, neither the economic literature nor the data presented by PFC support the claim that Measures 66 and 67 will be bad for the Oregon economy. Given our current economic straights, cutting public services would be far worse for the economy than these modest tax changes. Oregonians who are concerned about jobs should vote yes on Measures 66 and 67.
Altshuler, Rosanne & Kim Rueben., “Examination of Oregon’s Proposal to Raise the Top Corporate Tax Rate and Top Personal Income Tax Rates,” Urban Institute Brookings Institution Tax Policy Center, November 23, 2009.
Bartik, Tim, Tax Reform in Michigan, Testimony to the Michigan Legislature, June 2009.
Jaeger, William, “Weight Measures 66 and 67,” Eugene Register Guard, January 10, 2010.
Kolko, Jed, “Are the Rich Leaving California.” Public Policy Institute of California, July 2009.
Organization for Economic Cooperation and Development: Myles, Gareth D. (2009) “Economic Growth and the Role of Taxation: Aggregate Data” OECD Economics Department Working Paper no 714.
Thoma, Mark, Measures 66 and 67: the choices we face
Wasylenko, Michael, Taxation and economic development: The state of the Literature, New England Economic Review; Mar/Apr97, p37. Whitelaw, Ed & Ward, Bryce, “Measures 66 and 67: Weighing the choice of jobs vs. services,” The Oregonian, January 13, 2010.
Wasylenko, Michael, Taxation and economic development: The state of the Literature, New England Economic Review; Mar/Apr97, p37.
Whitelaw, Ed & Ward, Bryce, “Measures 66 and 67: Weighing the choice of jobs vs. services,” The Oregonian, January 13, 2010.