Monday, February 12, 2007

It's a dirty job, but somebody HAS to raise taxes 

That's the political advice being given by Lori Sturdevant of the DFLTribune. Calling such a move "courageous", she proceeds to give economic advice that raising taxes is not harmful to state economic growth. She calls first on a tax consumer:

Hearken to the words of University of Minnesota President Robert Bruininks last Tuesday. He was back in the classroom (that would be Room 5, State Office Building), doing a little teaching about the improbability of building a first-rate research university on third-rate state support.

State Rep. Melissa Hortman, DFL-Brooklyn Park, asked a good question. If the university needs more than the Republican governor proposes to allocate, "Where would you like us to get the money?"

Bruininks cleared his throat, carefully allowed that he was about to venture his own opinion rather than an officially sanctioned view, and said: "If it means, long term, that we have to put more and more of the cost of higher education on the backs of students, if it means long term that we've got to experience this kind of [financial] roller-coaster ride we've had for the past four years, you can raise my taxes."

We don't need to raise your taxes, sir; you can write your check to the university any time you like. What you are advocating is raising other peoples' taxes. It might help if you could convince us that the money wouldn't be used for new sports stadia and expensive athletic coaches. You had no problem, for example, charging students an additional fee for the stadium you can't share with the Vikings.

So much for that Captain Courageous. Ms Sturdevant then pimps for Education Minne$ota:
It brought to the Capitol a consulting economist with an impressive pedigree, Richard Sims, to present research findings he has already shared with 30 other states in the last two years.
My emphasis. An impressive pedigree? What, is he being shown at the Westminster Kennel Club? Richard Sims runs the Sierra Institute of Applied Economics, a think tank in the impressive location of Carson City, Nevada. I've never heard of this institute, and I've driven through Carson City -- it has the state capitol and some casinos, and not much else. Now look, I live in St. Cloud so I'm not one to talk about where one lives, but that doesn't give anyone an impressive pedigree. A search on the internet for this guy turns up two things -- He spends a good deal of time working for the NEA to defeat taxpayers' bills of rights, and he's been hauling this dog-and-pony show around the Plains states for a few months now. Maybe his impressive pedigree is helping the Montana tax consumers defeat a TABOR initiative there last fall. At least, that might be impressive to Lori Sturdevant.
Among them:

� States with the most robust economic growth also take a bigger tax bite, on average, than do slow-growth states.

He does this with a couple of slides that show the top ten states in economic growth on average have higher tax rates than the bottom ten states. What he does NOT do is show any causation from one to the other. The literature in economics on this is vast; I think the general wisdom one derives from it is that in the long run the effect is negative. Sims' analysis is not a dynamic, longitudinal study, but one which takes an average of rates over a relatively short period of time.

� Increases in education spending produce greater economic gain for a state than would a comparable reduction in corporate income taxes (this based on an Oregon study).
The one Oregon study I know, by Bania, Gray and Stone, increased spending in areas like education may have a positive influence on growth, but only in the short run. In the long run, there is no net effect. Moreover, states with increasing taxes don't necessarily invest in the productive areas; they may give away, say, half a million for regional community centers for towns with under 500 people.

What readers of Sturdevant's article will not learn is that the type of study being quoted requires a ceteris paribus adjustment. All other things equal, if you shift a dollar of spending from a nonproductive use to a productive one you will get greater growth. If you shift a dollar of taxes away from corporate taxation to, say, personal income taxes or property taxes, you will get a relatively small change in growth. Those are very reasonable things to say, and more to the point they are verifiable. But, they do not mean that you can get a positive effect on growth from taking a dollar of private spending and moving it to the government to spend on a productive activity. You cannot know what the private dollar was used for.

� Relatively high business taxes, "as long as they are not outlandishly out of line with other states," tend not to be harmful to economic growth.

"It's not that high state taxes are good for growth," Sims said. "It's that the relatively high level of services that are associated with relatively high taxes seems to attract growth, rather than repel it." Among the services state governments provide, the top three in importance for economic growth are "education, education, education," he added.

But again this misunderstands the nature of the research. If you have two states with the same tax rates, the one with more education services grows faster. That's absolutely true; it's an increase in human capital (though it doesn't say anything about whether the investment in human capital might be more efficiently done by private schools. That argument is for another day.) And, since the effect of increased spending on services will kick in before the negative effect on taxes, you can get a short-run spur to growth perhaps. I think it's theoretically possible, though not very likely. But the long run effects are that a) the positive effects of higher spending fall to zero and b) the negative effects of higher taxes are persistent and cumulative.

If Sturdevant actually believed all this stuff, she wouldn't have resorted to her last analysis that 2008 is a year in which the DFL can get away with it. Behold her cynicism:
DFLers are going to be accused of being "tax-and-spend liberals" no matter how they govern. That's been the GOP campaign mantra for 50 years. Why not be able to counter the charge by pointing to the good that some visible new spending will do for the state?

Given who sits in the governor's office, if DFLers pass a budget that contains a tax increase, they'll likely wind up pointing to the good they would have done, but for a veto they couldn't override. That might not be bad politics, either.

Because they'll point to the good, and not the bad. That's what politicians do. And the DFL has the easier sell -- it's easier to sell short-run benefits than it is long-run costs. That will be a test of Governor Pawlenty's leadership. I hope he's up to the task.

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