Jean Ross on the Defeat of Proposition 24

November 3, 2010

Following the defeat of Proposition 24, a ballot measure that would have repealed three recent business tax breaks, Jean Ross, executive director of the California Budget Project, a nonpartisan public policy research group, released this statement:

“The people of California voted down Proposition 24, which would have repealed three business tax breaks that will cost the state $1.3 billion or more per year when they take effect. Voters shouldn’t be asked to address complex tax issues at the ballot box.

Independent research shows that business tax breaks have little impact on job creation. But the loss of $1.3 billion a year in funding will widen the state’s budget gap and jeopardize funding for schools, health care, and other public structures that serve the common good. As part of a balanced budget solution, the Legislature should heed the call of editorial boards and analysts across the state and scale back these tax breaks to avoid further budget cuts that could harm the economy, jeopardize our economic competitiveness, and push the state back into a recession.”

— California Budget Project

Beware of Papers Bearing Complex Equations and Faulty Conclusions

October 12, 2010

Opponents of Proposition 24, which would repeal three business tax cuts enacted as part of the September 2008 and February 2009 budget agreements, frequently cite a deeply flawed study by Professor Charles Swenson of USC. The Swenson study argues that there is such a thing as a “free lunch” and that one of the three tax breaks – single sales factor (SSF) apportionment – that would be repealed by Proposition 24 would both increase jobs and state revenues. Regular Budget Bites readers know credible economic research shows that there is no such thing as a free lunch.

The Swenson report is so deeply and fundamentally flawed that it took Center on Budget and Policy Priorities researchers Michael Mazerov and Robert Tannenwald twenty pages to begin to inventory the study’s faults. Key among them are the facts that Swenson:

  • Cites employment data that diverge dramatically from official government statistics;
  • Misstates the dates that the states he compares to California adopted SSF apportionment;
  • Misidentifies the number of firms that benefited from SSF apportionment in the comparison states. In Georgia, for example, Swenson concludes that 3,109 firms in Georgia benefited from SSF, while the state’s own study found that the actual number was 12,426, almost four times as high; and
  • Fails to look at national employment trends during the period covered by the report.

And if that weren’t enough, the Swenson paper is riddled with mathematical and typographical errors. As we’ve noted before, not all research is created equal. Prudent consumers would be wise to do a “reality check” on studies that make claims that appear too good to be true.

– Jean Ross

Corporate Tax Cuts and Economic Growth

September 16, 2010

In the course of researching our analysis of Proposition 24, which would reverse three recent business tax breaks, we’ve come across two recent studies of note, and re-read an older monograph, that deserve a special mention. The first by Princeton economist Alan Blinder, former Vice Chairman of the Board of Governors of the Federal Reserve System, and Mark Zandi, Chief Economist of Moody’s Analytics, estimated that corporate tax rate reductions resulted in the least “bang for the buck” of options considered for stimulating the national economy. Each dollar of revenue lost due to a corporate tax rate reduction resulted in a $0.32 increase in economic growth, while a dollar spent on public infrastructure resulted in a $1.57 increase in GDP, and a dollar spent on increased food stamp benefits resulted in a $1.74 increase in GDP.

The second, by Center on Budget and Policy Priorities’ researcher Michael Mazerov, reviews the research on the economic impact and effectiveness of corporate tax reductions and concludes that “Corporate income tax cuts are unlikely to have a positive impact on a state’s rate of economic growth or the pace at which it generates private-sector jobs.”

The third, Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, by Washington College economist Robert Lynch examines the arguments made by advocates for tax cuts and the different approaches used to evaluate the impact of business tax incentives. The Lynch monograph is a “must read” for anyone seeking to understand the economic underpinnings of arguments over the relative impact of tax cuts and public services on economic growth.  Lynch concludes that, “An analysis of the relevant research literature, however, finds little grounds to support tax cuts and incentives – especially when they occur at the expense of public investment – as the best means to expand employment and spur growth.”

It is always a pleasure to come across well-reasoned, well-written, and fact-based policy papers. These are three that I, for one, would highly recommend adding to your fall reading list.

— Jean Ross


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