There can be little disagreement on the state of the economy these days. Most everyone says the nation is experiencing an economic downturn that’s having a widespread impact on all aspects of our lives.
Unemployment is rising. Wages are either stagnating or decreasing. People are spending less and as a result, governments across the state are seeing less in the form of tax revenue.
According to the Atlanta Business Chronicle, the state’s tax revenue is down two percent for fiscal year 2009 [Source: Atlanta Business Chronicle, "State tax revenue down slightly in Oct.", November 12, 2008]. In Cobb County, the tax collections from home sales and refinancings in 2008, once projected to be $2.7 million, is actually about half that number [Source: Atlanta Journal Constitution, "Economy squeezes Cobb County’s tax revenue", October 21, 2008]. And in Rome, the city’s sales tax revenue is falling about 1.5 percent below its 2007 collections [Source: Rome News-Tribune, "City pushes tax on Internet sales", December 3, 2008].
In the latest edition of the Atlanta alternative weekly Creative Loafing, writer Scott Henry makes a point that I’m sure we can all agree on:
If you had to take a paycut or your spouse was laid off, your family probably would respond by eating out less, postponing a vacation, maybe even — I can’t believe I’m suggesting this– downgrading to a basic cable package.
In other words, you’d cut expenses, right? For someone earning less money, that would seem the responsible thing to do.
Source: Creative Loafing, Tax. Spend. Repeat., December 3, 2008
Not only would it seem the responsible thing to do, it would also be the most logical thing to do.
If you’re earning less, you spend less.
But, Henry writes, leading economists including Nobel Prize-winner Paul Krugman say the government, who’s seeing less revenue like the rest of us, should spend more. In this state, Alan Essig of the Georgia Budget and Policy Institute says it would be a “huge mistake” for the state to spend less. Essig argues that cutting the budget, in these tough economic times, would make things worse.
Spending more when you’re earning less would make things worse. Now there’s something we can disagree about and here’s something else.
Essig along with Economics professor James Alm, formerly of the Andrew Young School of Policy Studies, both agree that the solution to our budget woes is to raise taxes. Essig argues that Georgia doesn’t have a spending problem. He says that we have a “revenue problem.” He says that our per-capita tax burden is one of the lowest in the country. So the answer, Essig says, is for the government to take some more of our money. Alm says that local and state governments should broaden the tax base by taxing services such as muffler repairs, haircuts and ironically, tax preparation, and by also taxing food.
On this, House Appropriations Committee Chair Ben Harbin (R – Evans) and I agree.
“The problem with raising taxes,” Harbin says, “is you hit people when they’re already down and you pull more money out of the economy.”
People are struggling to make ends meet and raising their taxes will not stimulate the economy.
The solution, I believe, is for the taxpayers to keep more of their hard-earned money and for the government to spend less.
The government should completely review the budget and make responsible cuts to spending we don’t need. The government should eliminate all the pork starting with the irresponsible “Go Fish Georgia” initiative. And the last thing the government should consider is a tax increase.
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Andre:
Allow me to respectfully disagree that a tax increase is the worst thing a state could do during a recession. An article written by Peter Orszag (President Elect Obama’s choice as Director of Office of Management and Budget) and Nobel Prize winning economist Joseph Stiglitz said it best ( http://www.cbpp.org/10-30-01sfp.htm ) .
“…economic analysis suggests that tax increases would not in general be more harmful to the economy than spending reductions. Indeed in the short run the adverse impact of a tax increase on the economy may, if anything, be smaller than the adverse impact of a spending reduction, because some of the tax increase would result in reduced saving rather than reduced consumption. For example, if taxes increase by $1, consumption may fall by 90 cents and savings may fall by 10 cents. Since a tax increase does not reduce consumption on a dollar-for-dollar basis, its negative impact on the economy is attenuated in the short run. Some types of spending reductions, however, would reduce demand in the economy on a dollar-for-dollar basis and therefore would be more harmful to the economy than a tax increase”.
“The conclusion is that, if anything, tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families. In any case, in terms of how counter-productive they are, there is no automatic preference for spending reductions rather than tax increases.”
According to the GSU Economic Forecasting Center state revenues are projected to decline 6% in the current fiscal year, which would result in a $2.5 billion shortfall. They are projecting an additional decline in revenues of 1 percent in FY 2010. A combination of targeted budget cuts, new revenues, federal aid and the strategic use of the Revenue Shortfall Reserve would be both best for the economy and insure the health, safety and welfare of Georgians.
Alan Essig
One of the things I thought I learned in a GSU economics class was that economic policy was futile if attempted at the state level, as there are too many leakages in the system to expect a reasonable multiplier effect.
I guess they don’t teach it that way there anymore.
I just wonder who paid Andre to post this
I dunno, but step one in an economics class is learning to read. For example, Nobel laureate Krugman is vouching for a move deeper into debt. That can’t work on the state level because state gov’s can’t borrow on the international market like the Feds can. Thus, conflating Krugman’s call for Keynes-type deficit spending with state tax-raising is a bad move. Further, Krugman talks about a tax hike (on the middle class) in bad times prolonging recessions (you tax after you get out of the hole to recover your money).
Also, Scott Henry makes a very dim-witted analogy to the current problem. It’s not just my spouse that’s laid off, it is both of us. We’ve already sold off all of the furniture (sovereign wealth funds buying up our businesses and real estate), are renting out the upstairs room to Saudi princeling backpackers (foreign debt), and have some balance on the credit cards.
If we don’t want to starve or be homeless, we’ve got to head to the credit cards. The essential bet there is that one of us will find work before we are forced to declare bankruptcy.
Krugman getting this year’s Nobel signals that all of the Nobel prizes are based on leftist politics and have no relation to scholarly merit. He’s a hack for the New York Times, and nothing more.
I wonder how much is saved via gas prices?
Add the Nobel Prize to the list of leftist conspiracy participants.
The list is getting awfully long.
At what point does it become so big that its no longer a conspiracy?
When the rest of us realize that Bush and company actually goverened to the left of Obama.
In defense of the GBPI, if you read through their policy papers, they’ve repeatedly called for targeted tax increases that are coupled with targeted spending cuts (along the same lines as Andre advocated for).
The two tax increases I’ve seen them call for are an increase in the cigarette tax by $1 per pack and – though I haven’t seen this advocated as of late, but I could wrong – a complete restructuring of the state income tax code that features an additional 7 percent top tax bracket for top wage-earners (which, it should be noted, would be completely offset since it could be itemized on federal tax returns).
Not saying these are good or bad ideas, but to suggest that Alan Essig wants to swoop in and tax everyone to death is terribly misleading. And Krugman notes that too – in fact he advocates for increased deficit spending in times of economic crisis without any tax increases, noting that FDR’s desire to balance the budget through spending cuts and tax hikes in 1937 led to the mini-recesion of that year.
I was talking about state tax increases in regards to the state budget during a resession. You would not want to raise federal taxes during a resession in that deficit spending is what gets you the stimulus.
My point is, in that state budgets must be balanced, there is an economic argument to increasing state taxes, especially on those with higher income, as opposed to cutting state spending. Both cutting state spending and increasing state taxes are negatives to the economy during a downturn. The question is which has the least negative impact. Ideally, the use of reserve funds and increased federal aid would help avoid having to cut spending or raise taxes in the short term. Unfortunatly, the state deficit is so large that other choices must be on the table.
Alan Essig
The state is about to pass along a major tax cut in the form of lower sales taxes on motor fuels. Yet the projects that these taxes pay for are significantly under funded. Additional funds will likely be needed soon, as the Obama administration appears set to launch a massive transportation initiative, which will likely require some sort of state matching funds.
For that reason and others, I would support an increase in motor fuel taxes, rather than the coming cut.
But I do not believe the state should set its taxation policy with its goal to be fiscal stimulus. The leakages in the system are too great.
The state should focus on spending the minimum required to deliver required services, and tax accordingly. Fiscal policy should be left to the federal government.
I was never arguing the support of state tax increases for fiscal policy reasons (i.e. stimulus). I was trying to answer Andre’s point that state tax increases are always bad in a recession. I think that for overall budget and public policy reasons cutting budgets for such vital government services as education, healthcare, child protective services, etc… is bad public policy (a point that honorable people can disagree honorably about). The fact that state tax increases might actually be better for the economy than certain budget cuts is a bonus.
Alan Essig
Fair enough.
Welcome to peach pundit, BTW. My manners escaped me by neglecting that earlier. No coffee yet today.
This was fun. Hope I was able to add something useful to the conversation.
Alan
Taxes have been cut to the point that we are unable to fund much of our necessary infrastructure.
While tax increases are not the answer…neither are tax cuts.
We need a public works project.
“Krugman getting this year’s Nobel signals that all of the Nobel prizes are based on leftist politics and have no relation to scholarly merit.”
Well, that’s good. I was tired of having to debate people that cited Hayek and Milton Friedman all the time.
Actually, I think the fact that guys like Hayek and Friedman can have the same prize as Krugman and Stieglitz just means that economics is one of those increasingly rare scientific pursuits where you can find extremely intelligent people on both sides of the academic debate.
And to the representative from GBPI, thanks for the perspective. I also tend to agree that taxes are poor instruments of fiscal policy, and that they are best set in respect to specific projects that are in mind (although a targeted set of infrastructure and spending projects does kind of live in both worlds).
I like and respect Steiglitz. Krugman is a lightweight.
What about the effect on jobs? I see the point of the 90-10 principle on taxed dollars, but what about jobs that are lost or are not created because a businessman is paying higher taxes? Since employees are wealth-creating assets, the business’ productivity is hampered by higher taxes while also there are fewer whole dollars in the economy to be taxed and to be spent.
I believe in tax cuts that are aimed at freeing up business earnings to bolster job creation. This boosts company profitability, creates a self-sufficient taxpayer, spurs the economy through additional consumption, and increases the tax base.
I appreciate the lively discussion of my article, but why does PP have to bogart all the site hits? Share the love, guys. The direct link to the story is http://atlanta.creativeloafing.com/gyrobase/experts_suggest_georgia_raise_taxes_fat_chance/Content?oid=629195.
I’m relieved to see Alan didn’t say I’d misquoted him, because budget policy is a complicated issue that’s more important than usual this year. I was encouraged speaking to Harbin; he seems one of the rare Georgia legislators who’s not putting politics before policy.
I can’t write a full post from my blackberry, so I’ll threadjack here under the guise of lost economic development.
The Washington Post is reporting that a site in Kansas has been chosen over Athens for the new bio defense lab.
A lack of a direct link from certain authors?
Shocking.
jsm –
If I understand GBPI’s comment correctly, a tax cut on business profits wouldn’t all go toward increased consumption – the business owner may or may not use that to increase employment (they might just save the extra money, or spend it abroad), whereas government spending (on something useful) plows the money back into the economy dollar for dollar.
Is there a way to really target tax cuts so that they prevent job loss or directly go to job creation? I’m genuinely curious.
How about we offer a reward for information leading to the conviction of criminals in government? Then we can put THEM on a road crew. It’s a win-win. Who knows? We could save $$millions$$. Right now crime pays more than the typical government salary.
jkga, I don’t know many businesses that don’t have to keep their money moving to stay competitive and grow. I’d have a hard time believing that a noticeable percentage of a corporate tax cut would go into savings. They’ll have more incentive to spend money abroad when the dollar is strong, but I don’t see the tax rate having a big effect on the amount of money going overseas.
Government spending may create jobs, but I have yet to see an efficiently run public works department. I’d rather promote businesses who are trying to trim the fat and make a profit than a government that is paying people to take their time about whatever they’re doing and to sometimes sit around with nothing to do. Let’s cut the corporate rate and pay good companies to build our roads, bridges, utilities, etc., for less than government could.
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