Tax cuts, jobs, and the difficulty of all things being equal


GOP gubernatorial nominee Rep. Tom Emmer released a revenue-cutting slice of his budget on Monday, calling it a jobs plan to revitalize Minnesota’s economy. It features business tax cuts and incentives to aid businesses, but would reduce state revenues by about $626 million.

Although the theory behind such cuts is that they are good for the economy, Emmer declined to say the cuts would “save or create some number of jobs.”

That’s smart, since research shows mixed results on the jobs impact from state business and income tax cuts.

Most of the studies (24 of 34) by researcher Michael Wasylenko found negative impacts on economic activity levels on the order of 0 to 3 percent. A study by researchers W. Robert Reed and Cynthia L. Rogers that examined New Jersey Gov. Christine Todd Whitman’s tax cuts in the mid-1990s concluded the tax cuts had no significant, specific impact on New Jersey employment growth.

And Rep. Emmer’s favorite role models for tax reform – Colorado, Rhode Island and, lately, Indiana – all have higher unemployment rates than Minnesota.

Economists agree that, all things being equal, lower taxes on businesses are better for private-sector growth and job retention than higher taxes. 

But all things are never equal. In states, taxes, spending and the economy don’t move independently, and public investment in education and infrastructure have positive economy impacts that offset the negative effects of higher taxes.      

It truly matters how a budget balances the revenue and spending sides, and so far, Rep. Emmer hasn’t shown how he’ll deliver the total package.

Rep. Emmer’s recommendations mirror fairly closely the two-year-old recommendations of Gov. Pawlenty’s 21st Century Tax Commission. We generally supported the business tax reductions it recommended, with the caveat that lost state revenues would have to be balanced through other means. 

Cutting business taxes probably won’t hurt the state business climate and might help when the national economy recovers. But without seeing the rest of the plan, it’s hard to say anything about short-term impacts.