Elliott Parker: Is raising taxes the worst thing we could do?
January 13, 2011
Governor Sandoval’s inauguration speech struck a hopeful note that Nevadans could come together to rebuild our economy. That same optimism was shared by at least 25,000 Nevadans who recently traveled to San Francisco to watch Nevada defeat Boston College.
But such optimism is dashed when the governor argues that “raising taxes would be the worst thing we could do” to address Nevada’s projected budget gap. In spite of everything we already know about the weakness of our state revenue structure, people seem to think that raising other taxes to pay for state expenditures would hurt the state’s economy, and make recovery from Nevada’s depression even harder.
This truism just isn’t true.
My prior columns in this newspaper have argued there is little historical evidence that lower tax rates are correlated with faster growth, either in Nevada or in the whole United States. I just re-examined growth rates for each of the states, for all years since 1964, and I find no correlation between a state’s growth and the size of state and local government. Simply put, there is a tradeoff between the costs and benefits of government, and there are too many variables for a simple relationship.
However, these same data show strong evidence that cutting the size of state and local governments in a recession makes the recession worse. How is this possible?
Taxes don’t change in a vacuum. Unlike the federal government, state and local governments must either cut their expenditures or raise tax rates in a recession, since the taxable base declines. While raising taxes may hurt the economy, cutting expenditures hurt it even more.
Our best estimates are that a $100 reduction in state and local spending reduces Nevada’s GDP by $162, and terminating 100 state or local employees reduces Nevada’s total employment by 153 workers. The increase in tax rates to pay for these expenditures reduces Nevada’s GDP by much less than that, so that a tax increase to prevent decreased expenditures actually helps the economy.
Of course, it also matters in the long run what we spend our money on. Are we investing it wisely in areas that benefit the state? Are we using it to maintain the quality of life in the state, or are we wasting it on spending that brings little benefit?
At the Nevada 2.0 conference that UNLV recently hosted, outside experts argued that a better-educated workforce is essential to Nevada’s future. Do reasonable people disagree with that? Isn’t slashing budgets for K-12 or higher education unwise?
Most Nevadans understand that our tax structure is outdated. We have studied this to death. We may disagree on what the best alternatives are, but we know the status quo is a problem. A recent study concluded we have one of the most undiversified tax structures in the country, and we will continue to have budget problems even if our economy recovers. Is there any better time than now to address it?
Raising taxes may not be the best thing to do, but the alternative of cutting spending in a recession is even worse. Conservatives may have many reasons to oppose any tax increases, but doing what is best for Nevada’s suffering economy should not be counted among them.
• Elliott Parker is professor and chair of the UNR Economics Department.