Missing the Boat: Business Taxes and Economic Growth

In Thursday’s edition of the Charleston Gazette, gubernatorial candidate Bill Maloney echoed a familiar refrain, arguing that the state needs to reduce its business taxes to achieve economic growth, citing “supply-side economics.” It’s an issue I’ve discussed before, and the latest evidence continues to confirm that low business taxes are not associated with stronger economic growth, nor do they make a state “business friendly.”

Last year, we released a brief demonstrating that there was no clear connection between low business taxes at the state and local level and economic and employment growth from 2001 to 2007, using data from the Council on State Taxation (COST), one of the best sources for state and local tax data (COST is also funded by very large multinational companies, so it is not exactly a liberal group.)
COST recently updated their annual report, with tax data for 2010, so I thought I would do the same. I compared change in private sector GSP, personal income, earnings, and nonfarm employment from 2009 to 2010 for each state with their respective total effective business tax rate, using the COST measurement of business taxes paid as a percent of private sector GSP. I also compared each state’s 2010 unemployment rate with their business tax rate. 
I’ll go through each result individually, but the overall conclusion was simple: for each measure of economic growth, there was no obvious connection between low taxes and high growth (or low unemployment). The evidence just isn’t there for the assertion that the state needs to lower its taxes to achieve prosperity. Instead, it would be refreshing to hear from politicians how they plan to address what does matter for economic growth: high-quality public services, a maintained infrastructure that is geared for the future, and quality schools and colleges that produce a highly skilled and well trained workforce. If we are forced to sacrifice these services in order to lower business taxes, we’ll likely end up disappointed.

While this post looks at just one year, stay tuned for a longer term look at the issue.

Private Sector GSP Growth (2009-2010) and Business Taxes
Source: BEA and COST
Private sector GDP growth and state and local business tax rates had a correlation coefficient of 0.0, suggesting there is no relationship between business taxes and state GDP growth.
Personal Income Growth (2009-2010) and Business Taxes

Source: BEA and COST
Personal income growth and state and local business tax rates had a correlation coefficient of 0.2,suggesting there is little relationship between business taxes and income growth.

Earnings Growth (2009-2010) and Business Taxes

Source: BEA and Cost

Earnings growth and state and local business tax rates had a correlation coefficient of 0.2,
suggesting there is little relationship between business taxes and earnings growth.

Unemployment Rate (2010) and Business Taxes

Source: BLS and COST

State unemployment rates and state and local business tax rates had a correlation coefficient     of   -0.2, suggesting that there is little relationship between unemployment rates and business taxes.

Nonfarm Employment Growth (2009-2010) and Business Taxes
Source: BLS and COST

Employment growth and state and local business tax rates had a correlation coefficient of 0.4, actually suggesting a slightly positive relationship between higher business taxes and higher employment growth, but by no means does it suggest causation.


CBO Says No Deficit Problem

 Berkley economist Brad Delong has repeatedly said that “It is a fact that if congress simply goes home–doesn’t do anything for the next 10 years except keep the federal government on autopilot–that we do not have a long run deficit problem.” While this may sound counter-intuitive, especially given the recent media hype sorrounding raising the debt limit, it is in fact spot on. As Bob Williams notes over at the Tax Policy Center, the recent CBO estimates show emphatically that this is the case. Under current law, our deficit is about 1 percent of GDP by 2015 and is very ‘manageable’ through 2021.

West Virginians the Most Pessimistic About the Economy

In the New York Times this weekend there was an interesting article about the Gallup Economic Confidence Index, which measure’s people’s confidence about the economy. The index is created through two poll questions, one which asks respondents if the current economic conditions are excellent, good, fair, or poor, and whether the economy is getting better or worse. For both questions the percent of negative answers is subtracted from the percent of positive answers to come up with the index.

The most recent results shows that people are pessimistic about the economy across the country (with the exception of those in Washington, D.C.). And of all the states, people in West Virginia are the most pessimistic, with an Economic Confidence Index of -44.
So why are West Virginians so pessimistic? In terms if GDP growth, West Virginia has been doing relatively well. In 2010, the state’s GDP grew 4%, good for 5th in the nation among the states, and much higher than the national rate of 2.6 percent.
When it comes to employment growth, West Virginia has been less impressive. According to the QCEW, West Virginia’s total employment grew 0.6 percent in 2010, putting us in the middle of the pack for state employment growth, but still positive.
So despite positive growth in West Virginia, West Virginians are still pessimistic. An item from a recent Jobs Count may provide a clue as to why. West Virginia’s employment to population ratio is at a 20+ year low, and is the lowest in the country. In July 2011, only 48.6% of West Virginia’s working age population had a job. With more than half of the state’s working age population without a job, its no surprise that West Virginians are pessimistic about the economy. Until the growth in GDP starts to translate into jobs, and those jobs go to West Virginians, they likely will stay pessimistic.

The War on Coal?

If you’ve read a newspaper, visited an airport, or driven on the highway lately, you’ve probably noticed a billboard or advertisement or two blaming the EPA for destroying coal jobs or creating a no job zone through environmental regulations. The supposed effects of the “war on coal” are not limited to Appalachia either, as U.S. representative Mike Simpson of Idaho recently claimed that, ” … the overregulation from EPA is at the heart of our stalled economy.” 

But if EPA regulations are creating a “no job zone” in Appalachia and stalling economic growth, then one would expect to find some serious declines in mining employment. But that isn’t the case. In fact, according to the BLS numbers, in the past 12 months, the mining sector has seen the largest increase in employment in West Virginia.
Despite being a primary target of environmental regulation, the mining sector in West Virginia has been the fastest growing sector of the economy in the past year. The trend holds true nationally too. The national data from the BLS, which can be broken down a little bit more, shows coal mining employment growth easily outpacing the rest of the economy, trailing only oil and gas extraction, and support activities for mining. 
Despite the rhetoric, there doesn’t seem to be a “no job zone” created by the EPA hurting coal. If this has been the result of the “War on Coal” so far, should we declare war on construction and manufacturing too?