Elliott Parker: Do taxes kill jobs? Let’s look at the facts
June 20, 2010
It is now our biannual silly season, where politicians hoping for election often say the strangest things.
One current claim making the rounds is that our state is in such sad shape because of the tax increases passed by our Legislature. Assemblyman Ty Cobb, who was running for the state Senate, said the Legislature expanded government “with a billion-dollar spending increase funded by job-killing tax hikes.” Gov. Gibbons called it the “worst thing we can do.”
Republican primary voters made a decision last week on the argument’s leading advocates. Perhaps we can now also dismiss the argument itself.
Did last year’s tax increase expand state government? Of course not. Government services in Nevada have been shrinking during this recession, not growing. State tax revenues declined much faster than the rest of our economy, and the tax increase only replaced some of the lost revenue.
More importantly, do taxes stifle economic growth? Many think the answer is obvious. Taxes reduce what the private sector can save or spend, and employers paying higher taxes have less to spend on paying their employees or their suppliers. Taxes also give a disincentive to do whatever activity is being taxed.
But what about the other half of the equation? If those taxes are being collected to pay for things like education, law enforcement or highway construction, then jobs are being funded in those sectors. Are those jobs not valuable too, and are those goods and services not important to the state? There are tradeoffs between how taxes affect the taxpayer, and what the taxes pay for.
Consider this graph, which shows personal income for both Nevada and the United States back to 1977, using quarterly data from the Bureau of Economic Analysis. I also show U.S. Gross Domestic Product, and a quarterly estimate of Nevada’s Gross State Product (GSP), which is only available annually. I then adjust for both population and price inflation, and show the points where taxes changed significantly, in the U.S. in 1981, 1993 and 2001, and in Nevada in 2003 and 2009.
These tax changes don’t appear to have clearly affected growth one way or another. Our last two state tax hikes were clearly in response to declining income, not the cause of it.
The graph also shows that Nevada, which has long had a higher average income than the rest of this country, has now lost that advantage. Our incomes have fallen much more than in the rest of the country, and we have not yet followed the country in recovery.
Why would taxes not hurt growth? Perhaps because tax rates in the U.S. are low, relative to the rest of the developed world. Relative to the rest of the states, state taxes in Nevada are even lower. Our general fund is not much more than 2 percent of our GSP, not a burden by any definition. At that low level, the tradeoffs might weigh more in favor of what the taxes pay for than for what they cost the taxpayer.
Finally, there are big differences between taxes that fund new programs, and taxes to prevent cuts to existing programs. When our state government is already small, it is more likely that the services that government provides are the most valuable ones. Funding those services is not really the worst thing we can do.
• Professor Elliott Parker is chair of the UNR Department of Economics.
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