Fact Check: Do Low Taxes = Low Unemployment?

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How you connect the dots depends on the picture you want to see. Speaking with GOP state leadership at a December 29 press conference, Minnesota Senate Deputy Majority Leader Geoff Michel saw it this way: “And Don, we just got the census numbers back and the high tax states have the least amount of employment and are losing members of Congress. So people are leaving the Illinois and the New Yorks and they’re going to places where they feel better about taking a risk, about growing something, about expanding a business. So we want to put Minnesota in that league of states. And raising taxes is not going to do it.”

But when you consider that Nevada has the nation’s second-lowest overall tax burden and the nation’s highest unemployment rate (14.3%)—even higher than beleaguered Michigan’s (12.4%)— the solution isn’t as simple as Senator Michel suggests. No evidence to support low taxes and high employment

“There is no evidence that low tax, small government states have lower unemployment, more employment growth, or higher income,” says Jeff Van Wychen, a fiscal policy fellow at the progressive think tank MN2020. He cites the U.S. Census Bureau, the U.S. Bureau of Economic Analysis, and the U.S. Department of Labor Statistics as his resources.

While the word “tax” grabs attention and raises hackles, Van Wychen prefers a wonkier term: “own-source revenue.” Own-source revenue, he says, is a more appropriate measure to analyze a state’s fiscal climate because it includes all monies that a state and local governments collect without federal aid added. State income tax, property tax, and license fees are all examples of own-source revenue.

From 2002 to 2008, Minnesota has led the nation in own-source revenue cuts: a total of $416 per capita (using 2008 dollars as a yardstick). According to the low-tax/low-employment model, Minnesota would also lead the nation in employment growth. It doesn’t. Minnesota ranks:

32nd in employment growth (January 2002 to November 2010)
42nd in the percentage of growth in median household income (2002 to 2009)
36th in the percentage of growth in per capita personal income (2002 to 2009)

Dane Smith, President of the progressive think tank Growth & Justice, agrees. “Minnesota and the United States at the beginning of this last decade cut taxes more than at any time in our recent history,” Smith says. “And the ensuing decade was the worst economically since the 1930s for both our nation and our state.”

As states compete in an increasingly global economy, Smith says, taxes rise and fall for reasons more complex than A + B = C. He continues, “Lots of games are played by liberals and conservatives through slicing and dicing of statistics to ‘prove’ cause-and-effect between taxes, public-sector investment and economic growth rates. Tax rates do have an impact on jobs and private-sector investment. But smart public investment in education and public works—in both improving human capital and physical infrastructure, from roads to university research—also is good for business in the long run.”

In short, there’s no short-form answer to the low taxes/low unemployment equation. But look for it to be offered up again and again in 2011.

Susan Maricle

Susan has volunteered for The UpTake since our early beginnings. If you've read a debate transcript here, it's likely her fleet and nimble fingers transcribed it.

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