As the nation’s governors gather in Williamsburg, Virginia this week, their focus is on their Chairman’s initiative, Growing State Economies. Too often, however, a governor’s knee-jerk response to a lagging economy is to start cutting taxes, even though state tax cuts offer a demonstrably low economic bang-for-the-buck, for a number of reasons. Since most states are required to balance their budgets every year, any tax cut requires an offsetting cut in state services, which acts as a drag on economic growth. Moreover, tax cuts at the top of the income ladder (as opposed to the bottom) are particularly ill-suited to boosting consumer demand, yet this is where the bulk of many recent tax cut plans have been targeted. Finally, many state tax cuts actually result in federal tax hikes for those same taxpayers, causing millions of dollars to flow out of the state as taxpayers watch their federal tax deductions shrink.
Tax cuts aren’t the economic panacea that is often claimed, but there are ways in which governors can reform their states’ tax codes to pave the way for improved economic performance. Four such options are described below, along with some brief notes about current governors from both parties that have accepted or shunned these valuable policy options.
Option 1: Create infrastructure jobs by raising gasoline and diesel taxes.
Option 2: Level the playing field for local retailers by enforcing sales tax laws on online shopping.
Option 3: Scrutinize special tax breaks to root out wasteful giveaways.
Option 4: If tax cuts are a priority, target them toward low-income families to maximize their impact.