Making Economic Sense of Measures 66 and 67

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:

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.

References:

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.

Comments

  • geoffludt (unverified)
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    Your assertion that siphoning resources FROM the PRODUCING private sector and transferring those resources TO the CONSUMING public sector is better because it shifts the burden of layoffs to the private sector from the public sector is ridiculous. Go back to school son.

  • Garage Wine (unverified)
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    Is this is the same Joe Cortright who wrote in The Oregonian less than a year ago: "The ONLY practical way to protect public services from the inherent volatility of Oregon's economy and revenue system is to expand our rainy day fund."

    And is it the same Joe Cortright who parrots Richard Florida's "creative class" mumbo jumbo. (Even Sam Adams doesn't buy that clap-trap anymore.)

  • (Show?)

    You say Producers, Joe says Creative Class Ho and Hum. The idea that Joe's analyisis and a Rainy Day Fund are somehow at odds is lost on me..........

    Joe, Thanks for providing at least one voice reflecting the opinion of the vast majority of actual Oregon economists, who have.....shall we say........smaller axes.....er, uh, maybe hatchets.....to grind than the CPI surrogates routinely trotted out by Acolytes of the Libertarian Religion here in Oregon.

    BTW: My favorite libertarian thinker has alwys been Salma Hyeck........ah.........nevermind.......

  • alcatross (unverified)
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    Paraphrasing Harry Truman's famous attitude towards economists: "if you laid all the economists end-to-end, they would still point in all directions." And every one will be full of reasons why the others are wrong.

    At the end of the day, people are going to line up with the economists who point in the direction they favor.

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    Joe, thanks for a job well done exposing the shoddy work ("don't assume malfeasance when mere incompetence will do") Pozdena, Fruits and Conerly have been putting out.

  • Geoffrey Ludt (unverified)
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    Hey, check it out! More leftist business acumen on display ... AIR AMERICA DECLARES BANKRUPTCY! http://www.politico.com/blogs/bensmith/0110/Air_America_declaring_bankruptcy.html

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    Geoffrey Ludt: Hey, check it out! More leftist business acumen on display

    At least they have the decency to just go out of business, rather than go crying to the government for a bailout, like you right wing assholes always do.

  • Jim Houser (unverified)
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    I am having trouble understanding how Measures 66 & 67 kill jobs. I have a small business (Oregon C-corp, annual revenues sufficient to trigger a tax increase) and this last Fall I added a full-time employee. (Actually elevated a student intern to full-time.) I made this decision to hire full-time based on sales volume (or, rather, lost sales). Most people I know make hiring (or layoff) decisions based on sales of products or services, not how much money they have in the bank after paying taxes. My expenses have all gone up this year (health care premiums alone up by 11%), and I will have to be creative about paying the extra costs. But I can't imagine laying off a productive, profitable employee in order to be better able to pay my expenses. That scenario makes no sense to me. Unless the "JKT" people think that somehow NIKE is going to whittle their staff down to the size of a $500K business to avoid their tax obligations, who cuts staff (and the attendant sales) to cut costs? Are there really many large companies keeping thousands of unproductive employees on staff? "We lose $XX per employee, but we make it up in volume." Like I say, the "JKT" line makes no sense to me.

  • Jake Oken-Berg (unverified)
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    Thanks Joe. Great research and great writing as always.

    Garage Wine, you quote Joe as saying "The only practical way to protect public services from the inherent volatility of Oregon's economy and revenue system is to expand our rainy day fund."

    This statement is accurate regardless of your position on Measures 66 and 67. It is also accurate regardless of your position on whether taxes should be raised or lowered for certain individuals and businesses in Oregon.

    When the dust settles on this election, and whatever the outcome, we should all come together -- Rs, Ds, Is, Business, Labor, etc. -- to expand our rainy day fund.

  • Kurt Chapman (unverified)
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    joe, I'm voting "Yes"; but you lost me at the very beginning. The line, "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."

    In the stated case of 66 and 67, the WILL BE NO higher public spending. this tax is merely to maintain the status quo. So, argue the theorhetical positives all you want, they can't happen given your underlying premise of increased public spending.

  • Peter Noordijk (unverified)
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    I'm sorry but the people who think that teachers or medical services providers don't add value are either lying or very dumb. The number 1 creator of new wealth is human capital. By far, the leading contributor to human capital is education.

    Spend more on education- enjoy higher standards of living and a more efficient and productive workforce- that is all there is to it for all countries over all history. It is an investment that returns to individuals, and even more so to society. Cut funding to education and experience the reverse, sliding down to lower productivity, less investment in education less productivity, etc...

    Besides, what productive investment is Phil Knight going to drop his billions into? Federal Debt. Might as well collect it here and not finance a bridge in Alaska with 10 years interest.

  • Mike (unverified)
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    Peter,

    I don't think you'll find anyone saying that education is not important for some of the very points you make.

    The question is how much should we be investing in education.

    I'm all for investing in effective education, but to stop when there is waste or signs that the investment is not effective.

    None of us know what this threshold is, but we all have been exposed to examples of success, but unfortunately also of waste and ineffectiveness.

    When I worked with our school district, I discovered and closed the hole in several situations where our district was leaking money in large amounts. Most districts have community members who can contribute by being on their budget committees, or other committees that help the districts make improvements.

    To simply say that adding more money is the best solution is seriously misguided.

  • (Show?)

    Kurt, if M66 and M67 don't pass, there will be substantial cuts to public services. That's what Cortright is referring to.

    Alcatross, if you have some reputable economists to line up on your side, go for it. Seems to me that Cortright has a stack of citations a mile high, against three measly hired guns. Yet you say they the arguments have comparable support? In what alternate universe? I guess the same one where Fox News is fair and balanced because they have Susan Estrich on once a day.

  • Tim McCafferty (unverified)
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    "To Whom It May Concern!"

    I want to know when it happened? When did Americans begin to believe that we all were detached from each other as citizens?

    When did a public education become a fiction?

    How do Americans presume to thump their chests about being the greatest democracy in the world, and forsake their fellow citizens, insist they are entitled to be autonomous from their fellow American?

    How do we still insist any tax is a bad tax no matter how urgent the need of their fellow citizens? Are there not enough millionaires and billionaires, and working poor to make it clear to us all. How far must we sink before we come together for no other reason than it's the right thing for our fellow citizens?

    If my father's generation could pony up 70% for the top tax bracket, and pay capital gains tax as normal income, regardless of the ridiculous argument that it is some how double taxation, why do our generation insist on the hysteria about any tax while the rates today are 35% for the top tax bracket, and even 15% for hedge funds?

    How many Bernie Madoffs, Enrons, and Bailouts must we endure before we recognize that our government is US!

    Is our generation only half as responsible for its fellow citizen, or are we just only half as capable?

    Letting the billionaires, millionaires, and corporations dictate public policy, and public priorities is not the character of a citizen democracy; it is at best a plutocracy, and at least a shame! But did I really need to explain that?

    I stand in support of a strong future for my children, and I don't want to leave them an future community meant only to serve the greed of a corporate controlled society!

    Oregon legislators had the foresight, and courage to start in a very, very small way the beginning of a sensible, healthy progressive tax policy that our previous generation was willing to pay. If we are charged with making the future of our children better than our own, we have a long way to go, and little time left to get it done.

    If you think that your child is getting as good an education as you did, then you should vote YES for Measures 66 (1.8% over $250kHH/$125kInd.),and Measure 67 (.001% over $500k)!

    If you believe being a citizen of Oregon is more than just taking up space, YOU SHOULD VOTE YES ON MEASURES 66/67!

    Happy Thoughts; Timothy McCafferty

  • Ed (unverified)
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    Important thing to consider:

    Despite his remarkable self-promotion, Joe Cortright has no formal training in economic theory or econometrics that qualifies him to proffer any opinion on tax policy and econometric research. His resume at Impresa.com indicates a "degree from Lewis & Clark.." and a master's in public policy.

    In fact, the only new counter-evidence he provides is largely aggregated analysis across different states with dramatically different fiscal structures published THIRTEEN years ago. Hmm.. thousands of economists, hundreds of economic journals, and he couldn't find a single paper in the last 13 years that supports his position?

    Mark Thoma? A macroeconomic, money supply economist by trade. Nobody credible would pay him to analyze tax policy.

    Ed Whitelaw? Not a policy economist, either. In fact, most of his time is now spent in narrow focus providing expert testimony for litigation.

    And even if Joe actually had the training, I'm personally uncomfortable with the current Chair of Governor's Kulongoski's economic advisory council firing off weak policy editorials on a PARTISAN website.

    Apparently Joe doesn't make the cut anymore at the Oregonian or other, more appropriate venues for his status.

    But hey, that's just me.

  • Steve Buckstein (unverified)
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    paul g. - you ask "...if you have some reputable economists to line up on your side, go for it. Seems to me that Cortright has a stack of citations a mile high, against three measly hired guns. Yet you say they the arguments have comparable support? In what alternate universe?"

    In the real economic universe, here are just the first thirteen of 81 sources listed at the end of the Fruits/Pozdena analysis:

    -Barro, R. J. (1991). Economic growth in a cross section of countries. Quarterly Journal of Economics, 106(2):407443.

    -Barro, R. J. (1996). Determinants of economic growth: A cross-country empirical study. Working Paper No. 5698, National Bureau of Economic Research.

    -Barro, R. J. and Sala-i-Martin, X. (1992). Convergence. Journal of Political Economy, 100(2):223251.

    -Bartik, T. J. (1991). Who Benefits from State and Local Economic Development Policies? W. E. Upjohn Institute, Kalamazoo, MI.

    -Bartik, T. J. (1995). Economic development strategies. Working Paper 95-33, W. E. Upjohn Institute for Employment Research.

    -Baumol, W. J. (1967). Macroeconomics of unbalanced growth: The anatomy of urban crisis. American Economic Review, 57(3):415426.

    -Brett, C., and J. Pinske (2000). “The Determinants of Municipal Tax Rates in British Columbia,” Canadian Journal of Economics, 33, 695714.

    -Brueckner, J., and L. Saavedra (2001). “Do Local Governments Engage in Strategic Property-Tax Competition?” National Tax Journal, 54, 203229.

    -Bucks, B., A. Kennickell, T. Mach, and K. Moore (2009). “Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances.” Federal Reserve Bulletin (February 2009), pp. A1A55, and the associated “2007 SCF Chartbook” file derived from this report.

    -Cebula, R. (1974). Interstate Migration and the Tiebout Hypothesis: An Analysis According to Race, Sex and Age. Journal of the American Statistical Association, Vol. 69, No. 348, pp. 876-879.

    -Cebula, R. J. (1979). “A Survey of the Migration-Impact of State and Local Government Policies.” Public Finance/Finances Publiques, 34, 6984.

    -Cebula, R. J. (2009). Migration and the Tiebout-Tullock hypothesis revisited. American Journal of Economics & Sociology, 68(2):541551.

    -Clark, D. E., and W. J. Hunter (1992). “The Impact of Economic Opportunity, Amenities, and Fiscal Factors on Age-Specific Migration Rates,” Journal of Regional Science, 21, 349365.

  • rw (unverified)
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    Timothy:

    I like the sounds of your call to thought. I hope you are of my son's generation or the one just ahead of it. We really need you and more like you as, sadly, many of those you are mentioning are of the generation that had University educations all but handed to them... and the explosive growth of freedoms, expression and the push-back of boundaries did NOT develop a more-thoughtful, committed and sacrificial generation. Spoze it's social genetics.

    That was nice to read.

  • Joshua Welch (unverified)
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    William Jennings Bryan at the Democratic National Convention in Chicago in 1896.

    "There are those who believe that you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it."

  • andy (unverified)
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    I voted no on both measures without even bothering to read any of the economist's writings. It is just simply obvious to me as a business owner that a no vote was necessary. Salem can't seem to figure out how to manage their business so they expect me to pay extra. Sorry, I'm not interested in that deal. Show me that you know how to run your business and then I might be interested in pitching in where required. Spending like a drunken sailor and then asking for more money isn't getting a yes vote from me.

  • wnd (unverified)
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    "Cutting off the nose to spite the face" - albeit apropos to yes votes attending Measures 66 and 67.

    Indeed, the State of Oregon has already 'toasted' taxpayers with a Champagne PERS and overflowing Beer (bier) budget of SPENDING INCREASES currently "granted" by existing legislation.

    Now progressive tax and spenders vaunt even MORE in a down economy. Eh?

    Here we have yet another SALES TAX FOX (this time in disguise) seeking to pluck more 'Au' eggs from a HEN HOUSE already taken with DIMINISHED FERTILITY - but, bray tell, Dem progressives and their PAC mules can't seem to just take NO for answer. Yes'm folks, union bet on that.

    Bottom Line: Measures 66 and 67 are akin to adding more expansion holes to a belt in reality, need of tightening.

    Pray tell, a "Brown out" to tax and spend succoring is sorely needed here, too.

  • (Show?)

    Steve, you probably need to take to time to read those sources you cite before you draw your conclusions. The literature on the relationship between state and local taxes and economic performance is very inconclusive.

    I know that as one who has looked high and low for a clear answer on the question of whether business tax incentives are an effective recruitment tool for economic development agencies like the one I head. The best I can come up with is, "It depends."

    The idea that anyone can predict the ten-year job losses associated with relatively minor tax increases like those proposed in Measures 66 & 67 is very hard to swallow, particularly when (at least in the current biennium) the money is going to be immediately spent and not used to offset a deficit--which, of course, state and local governments can't run.

    I recognize that reasonable people can disagree as to whether the services being provided justify the taxes being raised, but I think both sides in this debate are off-base arguing that these measures will have a significant impact on the economy either way.

  • BillJ (unverified)
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    Steve Buckstein - there is a big difference between putting a list of economics publications at the end of a document and actually using that economic research as the basis for the analysis. What Cortright correctly points out is that Pozdena, Conerly and Fruits (as well as Steve Buckstein who writes for the libertarian Cascade Policy Institute) appear to want to have the credibility of the peer reviewed economics research but don't want to come to the conclusions suggested by the peer-reviewed economics literature. They repeatedly misrepresent specific economics studies, and when they claim to come up with estimates of the effects of state taxes on jobs that are 5 or 10 times larger than those in the literature, they do not appear to stop and ask: why are our results out of line with the dozens of peer-reviewed results that have been published over the past 30 years? In December, Pozdena and Fruits have 'released' a study on the effects of Measures 66 & 67 (paid for by the Cascade Policy Institute) but will not allow other economists to see the details of their data, methods, or quantitative results. This kind of action is at odds with the professional standards of economics.

  • geoffludt (unverified)
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    @ Steve Maurer re: bailouts.

    Dude, we're on the same side on this issue. I am aghast by the bailouts that started under Bush and accelerated under Obama. When Government gets in bed with an oligarchy of financiers (Bernanke, Geithner, etc) ... the seeds of statism germinate.

    Geoff

  • Zarathustra (unverified)
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    Seeds? We've got a freaking sequoia! And we're attacking it with a stone hand ax...

  • ED (unverified)
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    <h2>Here is how Measure 66 and 67 will be carried out in many small companies across the state (if they STAY in the state): The owners will calculate the increase in taxes they owe due to this farce, and reduce the bonuses and other benefits to their employees. The losers due to the passing of these measures are the very people you claim to be helping. Your claim is ridiculous.</h2>
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