Monday, April 16, 2007

Now is the time for a tax cut 

As Gary mentioned on the air Saturday, the House Taxes Committee remarkably chose to schedule hearings today on HF60 and HF62, both introduced by Rep. Laura Brod very early in the session. HF60 envisions reducing the tax rate lower two brackets while HF62 would lower the rate only on the lowest tax bracket. I am inclined to argue for the broader tax cut in HF60. I sent Rep. Brod these talking points in favor of the bills:
  1. Like other bills proposed in this session, these bills increase the progressivity of the Minnesota tax system. The increase in progressivity for the system overall would be quite modest, but it comes at a time with heightened concern over tax equity, and provides greater equity without compelling anyone to give more money to the government.
  2. Lower taxes on income will increase work effort in Minnesota. By allowing workers to keep more of their income they will respond by providing more hours of employment and increase the amount of output Minnesota creates. Most research done on labor supply response to taxes indicate that women and single mothers in particular will respond to a decrease in state income taxes by increasing their labor supply. (See for example Bruce Meyer and Dan Rosenbaum, "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers," Quarterly Journal of Economics August 2001.) As some areas of the state, particularly outstate, have reported labor shortages, increased work effort will help stimulate the Minnesota economy.
  3. Most importantly, this is a particularly good time for a tax cut because of weakness in the Minnesota economy. Numerous economic researchers in Minnesota have found that the economy is turning negative right now. The Federal Reserve Bank of Minneapolis forecast last November that the Minnesota economy would experience job growth of only 1.5% and personal income growth less than 5%. These are both below historical means. The Mid-American States survey from Creighton University forecasts that unemployment, while currently below the national unemployment rate, will rise above the national rate by the end of the second quarter of this year. Food processors and transportation industries have been hit rather hard. And the St. Cloud Quarterly Business Report released two weeks ago reported "The St. Cloud-area economy slowed in the past three months as firms reported weakness across a variety of activities. While these bills do not directly help business, they indirectly help in providing additional discretionary income to Minnesota consumers. (Full disclosure: I am co-author of the St. Cloud QBR.)
Additional note (I did not send this to the representative): If I was the new DFL majority in the legislature, would it be prudent for me to raise taxes when the state economy might slow down in the next year? Suppose Minnesota does slow down and thus tax revenues do not meet the forecast values from the previous forecast. See for instance this from the Dept. of Finance:
Economists have grown less optimistic about the outlook for 2007. The slumping housing sector remains a major concern, but that is no longer the only potential problem. Business equipment spending has weakened and the current inventory correction may have even further to go. With no offsetting good news, forecasts for growth in 2007 and 2008 have been cut back. The change in the Blue Chip Consensus forecast, a summary of 50 top forecasters, is typical. February�s Blue Chip forecast called for 2.7 percent real GDP growth in 2007. Now, the consensus expects growth at an annual rate of 2.3 percent.
And so on. Does this sound like a time for vast new spending programs that require $5 billion in extra taxes to you?

Someone may say that I always prefer tax cuts, and they'd be right. But just as anti-inflationary policies can be opportunistic -- using positive supply developments to ratchet down inflationary expectations -- so too can tax cuts be put forward opportunistically, to leverage those who adhere to Keynesian notions of fiscal stimulus in the package to go with those who are opposed to government spending on more philosophical grounds. Now is such a time.

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