Dueling Economic Theories: Implications for State Tax Policy

It is an oft repeated truism that "states are the laboratories of democracy." It is also undeniable that tax policies often engender some of the most heated debate with passions running high on both sides. As battles between President Obama and House Republicans have shown, arguments about taxes reflect much more than mere budgetary math and "appropriate rates." It also touches upon political philosophy/ideology, notions of fairness and differing economic theories. But this battle isn't just taking place at the federal level- it is also raging in the states.

It is an oft repeated truism that "states are the laboratories of democracy." It is also undeniable that tax policies often engender some of the most heated debate with passions running high on both sides. As battles between President Obama and House Republicans have shown, arguments about taxes reflect much more than mere budgetary math and "appropriate rates." It also touches upon political philosophy/ideology, notions of fairness and differing economic theories. But this battle isn't just taking place at the federal level- it is also raging in the states.

According to a recent Wall Street Journal article, states are taking very different approaches to tax policy. For example, the so-called blue Democratic states have recently enacted tax hikes on the top earners in order to fund infrastructure and early education programs. According to the Democratic governor of Minnesota Mark Dayton, “It is just what government should be doing, and just what Republicans refuse to acknowledge government should be doing." At the same time, Minnesota Republican House member Greg Davids had an entirely different opinion of the approach, saying that this "overstretch by the majority will leave Minnesota far out of the mainstream."

This battle is heating up now, at least in part, because state revenues are just now returning to pre-2008 levels, thereby forcing legislators to make choices as to which programs to revive or add.

In other Republican-led states, policymakers are voting to  maintain lower tax rates or cut tax rates further in the belief that such an environment is more conducive to businesses locating there and increasing employment. For example, Republican governors in Ohio, Nebraska and Louisiana have all argued for significantly limiting or eliminating income taxes in their states because they say that those taxes impede economic growth and discourage businesses from locating in their states.There is some division, however, between Republicans on how to make up the lost revenue that a tax break necessarily entails.

David Madland, director of the progressive American Worker Project (part of the Center for American Progress), explained to the WSJ, "you have got these two theories being played out of what creates economic growth." 

 

 

 

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