The Test Tank

Despite last year's projections that Minnesota would once again face a deficit, we are running a surplus, while at the same time our state no longer ranks in the top four or five in per capita taxation but has dropped to 16th. In Rhode Island, about a blue a state as you can get, the top tax rate has been cut from 9.9 percent to 5.5 percent, and the state has gone from the third-highest individual income tax rate to the 27th. According to William Murphy, the Democratic House speaker, to the business leaders who choose where their companies move and create jobs, the tax rate makes a big difference. In New Mexico, Democratic Gov. Bill Richardson has cut the top income tax rate in half. New Mexico now has a half-billon-dollar surplus and has seen tax revenues increase by 27 percent this year, faster than any other state in the union.

Yes, it's counterintuitive to claim that lowering taxes increases tax revenues. But it does, not only because it attracts more businesses and jobs. It's also because the more money people have to spend on themselves rather than have confiscated by government, the more those dollars circulate to generate greater demand for goods and services, the more jobs that are created to supply those goods and services and the more income that is spread among more people -- and thus, more tax revenue.

–Dan Cohen

Cohen claimed that New Mexico cut its top income tax rate in half. Actually, they are phasing in a cut of 40%, but so far it’s only about 30%. More significantly, Cohen claimed that New Mexico’s state tax revenue rose by 27% in one year after the tax cut. But the state’s own data for the past two fiscal years show that the general fund, which includes all the major state taxes, grew only 7.7% and then an estimated 6.3% -- about one-fourth the annual rate of growth that Cohen claimed. Okay, his "facts" don’t match what the government reports, but New Mexico did show some growth after cutting the income tax – so is Cohen right to assert that the tax cut caused the revenue growth? Absolutely not. New Mexico is a major producer of oil and natural gas, and a spike in the price of oil and gas boosted the taxes and lease fees on production in the state by 38% this year (on top of about 30% the year before). This leap explains all the growth in New Mexico’s revenue – personal income tax collections actually dropped this year. The supply-side theory Cohen is selling – that tax cuts create enough economic growth to more than pay for themselves – failed during the administration of President Reagan and is failing again under George W. Bush, resulting both times in skyrocketing national debt. And Minnesota’s tax cuts in the late 90s failed, too – creating a fiscal crisis and a slower-growing economy.

# posted by Charlie Quimby @ 7/12/2006 08:16:00 AM