Do Tax Cuts Create Jobs?
The idea of economic zones with lower taxes to spur business has been floated since the 1970s, most notably by the late U.S. Rep. Jack Kemp in the 1980s and 1990s. But the idea has never gotten anywhere on the federal level.
Economists have debated for decades whether tax cuts lead to jobs and can’t find a clear consensus.
When 41 economists were asked in 2012 by the University of Chicago’s Initiatives on Global Markets about whether tax cuts lead to job creation, the results were split: 43 percent of the respondents thought a cut in tax rates would lead to increased gross domestic product in the next five years, while 48 percent were uncertain. Almost all of the economists, 96 percent, didn’t subscribe to the philosophy that tax cuts would increase tax revenue by increasing the amount of income of taxpayers.
Tax incentives play a role in job creation, but so do roads, bridges, schools and sewers, said Matt Davis, senior vice president of government affairs for the Cincinnati USA Regional Chamber. Texas has snagged local companies, such as Toyota, which is moving its North American manufacturing headquarters and 1,600 jobs from Northern Kentucky to suburban Dallas. But Texas also has 14 toll road and bridge projects started or completed since 2006 and many other investments inroads and bridges.
“What has the best business climate is made up of variables like infrastructure, health care costs, tax structure, energy – these all play a role,” Davis said.
Critics of tax cuts say infrastructure and targeted investments make more of a difference. That’s what businesses tell Ohio state Rep. Denise Driehaus, D-Clifton Heights, who served for four years on the Ohio Development Finance Advisory Council that gave loans and grants to businesses.
When Ohio substituted several business taxes with a 0.26 percent commercial activity (CAT) tax on all sales to Ohio customers, the state took a hit in revenue, Driehaus said.
“If you keep lowering taxes for corporations to a point, that’s fine, but if you lower them (below that) point you are no longer able to investin what matters to businesses – roads, bridges, education – then you’ve defeated the purpose of the tax incentive,” Driehaus said.
Louisiana found offering tax credits in “enterprise zones” didn’t necessarily attract quality development. Many complained of big-box retailers and other large companies using tax credits to move into already affluent areas. Instead of creating jobs, it often just moved jobs around in the community, said Jeff Chapman, director of economic development issues at the Pew Charitable Trust.
Louisiana has since retooled tax incentives to target specific jobs and industries.
“If you give a restaurant money to hire a new worker, it doesn’t change the total demand for restaurants in the area,” Chapman said. “That job might be at the cost of a different job in another restaurant.”
Kansas made sweeping changes in 2012, lowering its corporate and personal income taxes and creating many business exemptions. This led to praise from the business community but negative reviews from economic experts. The Washington, D.C.-based liberal think tank Center on Budget and Policy Priorities this year issued a scathing report on Kansas’ tax cuts, saying they skewed toward the rich and dramatically increased deficits.
Kansas this year received $803 million less in revenue than the previous year and will have a $5 billion revenue loss by 2019, according to the report. The same report showed job growth in Kansas lagged behind the national average. Between Dec. 2012 and Jan. 2014, jobs grew by 2 percent in Kansas, compared to 2.2 percent nationally.