Saturday, December 21, 2013

Rusthoven: The Media Misunderstands Tax Cuts

By Peter Rusthoven in the Indianapolis Business Journal:

Gov. Mike Pence just “outlined an aggressive agenda to bolster education and job initiatives along with a proposal to eliminate the business personal property tax.” The words are from Indiana Fiscal Policy Institute President John Ketzenberger, longtime journalist and longtime friend.

My friend John doesn’t like the governor’s proposal. His column, titled “Cutting taxes could cost state in long run,” begins: “A promise to cut or eliminate taxes is a politician’s sure-fire way to curry favor among the electorate.” Though “proposed in the name of improving the state’s economy,” Ketzenberger says “it’s likely the governor’s ideas will cost the state more money.”

Citing past business tax amounts used by local government, he questions—given “slower-than-expected economic growth stunting tax collections”—if now is a time for tax cuts.

Ketzenberger’s column is not didactic, and includes some good points. But much of it captures what pro-growth conservatives find frustrating with media coverage of tax issues.

One is impugning motives of tax-cut proponents. Ketzenberger’s opening sentence presumes they are pandering to selfish voters. Saying cuts are “proposed in the name of improving the state’s economy” but will really “cost the state” implies that stated motives are merely nominal.

The more important frustration involves ignoring the impact of taxes on private-sector activity, on which government revenue itself depends. That impact, unmentioned by Ketzenberger, is the very reason for Pence’s proposal.

The business personal property tax directly taxes capital investment. Such investment is key to growth and job creation—especially in manufacturing-heavy Indiana, where expansion often demands investing in equipment and machinery.

The tax puts us at a competitive disadvantage with neighboring states in attracting industry. Illinois and Ohio have no personal property tax. Michigan is phasing its out. Only four states and the District of Columbia tax personal property at higher rates than Indiana.

Being better than D.C. on tax policy reminds me of former Education Secretary Bill Bennett’s response when folks in Chicago said their schools weren’t as bad as Detroit’s: “You need higher ambitions.”

An Anderson Economic Group study of business taxes shows that a 10-percent decrease in the overall tax burden yields a 1.5-percent to 3.5-percent increase in fixed investment and business consumption.

In Indiana, where personal property tax accounts for 9 percent of the overall burden, elimination translates to a 1.35-percent to 3.15-percent increase in business activity. That’s a lot of new activity, new jobs, and—lest we forget, as media coverage tends to—new tax revenue from job growth.

Ronald Reagan said, “If you want less of something, tax it.” This is routinely overlooked, as it is in Ketzenberger’s column. Pence understands that, “If you want less capital investment in Indiana, tax it.” The result will be less growth and fewer jobs.

Pence wants more. He’s right. He’s also right, as was Reagan, that periods of “slower-than-expected economic growth” are when tax cuts are most needed.