Senate Republicans kneel before the Magic Tax Cut Fairy, are wrong | News
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Wednesday, April 22, 2015

Senate Republicans kneel before the Magic Tax Cut Fairy, are wrong

Posted by on Wed, Apr 22, 2015 at 5:56 PM

As I noted yesterday in this space, It is a fundamental principle of supply-side economics that tax cuts basically pay for themselves—that is to say, whatever losses the state would incur will be offset by the improving economy those tax cuts spur, which will lead to the state bringing in at least as much if not more money because, even if people are paying a smaller percentage of their incomes to the state, there’s more money to go around. 

This is the myth of the Magic Tax Cut Fairy. 

People who pay attention to macroeconomics have known for some time—and folks in Kansas are starting to figure out now—that the Magic Tax Cut Fairy doesn’t exist. Here’s the Washington Post back in 2007, when some congressional Republicans were arguing that, in the words of then-U.S. Senate Minority Leader John Boehner, “Tax relief pays for itself.” (It does not.)

This is not a merely academic debate, although no serious academic, including Mr. Bush's own economists, has argued that tax cuts produce enough additional economic growth to make up for lost revenue.

I mention that because the Magic Tax Cut Fairy reared her ugly, misbegotten head earlier this morning at a meeting of the North Carolina Senate Finance Committee, which was considering a handful of different tax cuts packages. Here I’ll focus on the most wide-reaching, Senate Bill 526, the Job Creation and Tax Relief Act of 2015, which builds upon tax cuts the General Assembly passed back in 2013. Without getting too deep in the weeds, SB 526 would further reduce the individual income tax rate over the next two years from the current 5.75 percent to 5.5 percent; replace the standard exemption (now $15,000) with a “zero tax bracket,” which will mean that the state won’t tax you on, eventually, your first $20,000 in income; reduce the corporate income tax; and change the way the state’s economic incentives program is divvied up, as Republicans think the current system favors advanced urban areas over rural ones.  

This will, according to a fiscal note prepared by the General Assembly’s staff, cost the state $6.974 billion over the next five years. Except, according to Republicans on the Finance Committee, that is not true and will not cost the state anything. 

Here was one telling exchange, transcribed as precisely as my handwriting would allow:

Sen. Josh Stein, D-Wake, after discussing the nearly $7 billion hit: “Question for Sen. Brown: How does that feel? As an appropriations chair, is that practical?”

Sen. Harry Brown, R-Jones and Onslow: “There is no revenue particularly lost,” adding that what was lost would be made up in increased employment. 

At this point, Sen. Bob Rucho, R-Mecklenburg, an SB 526 sponsor, chimed in: “We had a tax cut in fiscal year ’14-’15; the estimated new revenue is $780 million. Do you think it’s bad that you have nearly $780 million more money than you did the previous year?” 

Stein: “I would love to have that.” 

Rucho was both perfectly correct and terribly deceptive. The state did pass a tax cut, and the state does have $780 million more coming in this year than last. The logic, though, is fallacious: the post hoc ergo proctor hoc fallacy, to be exact. Put simply, it does not follow that the tax cuts generated that additional revenue, nor does it follow that those tax cuts didn’t injure the state’s finances or that more tax cuts wouldn’t exact some considerable amount of damage. 

I asked Alexandra Sirota, a policy analyst at the left-leaning N.C. Budget & Tax Center who sort of specializes in the state budget, for her take. She replied in an email: 

[Rucho’s assertion is] suspect indeed since we know that the ideological foundation for the idea that tax cuts lead to more revenue has largely been discredited. What Senator Rucho is referring to is the year over year growth in revenue that is part of any functioning revenue system particularly in a recovery period (obviously revenues have been known to fall). The fact that there is revenue growth does not negate the fact that the tax cuts passed in 2013 were very costly to the state. Moreover, based on the consensus forecast that was released recently, official analysis finds that revenues are growing at a rate far below the long-run average and below what they were projected to grow at for this year.

So yes, there is revenue growth (I can’t confirm the exact $780 million figure that he is using) but it isn't new revenue. It is largely committed to enrollment growth and would allow no new funding for initiatives that could make our state competitive. If Senate Bill 526 is enacted it would actually lock in current spending levels by putting natural revenue growth (and then some) towards income tax cuts. This is a bad idea for NC, we know that there are very real needs to be met in communities, classrooms and courts, for example and without revenue to make those investments we will not just stall but fall further behind.

In other words: That extra money came because the state’s economy was recovering from the Great Recession, and though it was more than the previous fiscal year’s take, it was not as much as was projected before the tax cuts were passed. The next batch of tax cuts would make the state’s fiscal situation even more dire. 

The graph below is taken from a BTC report

screen_shot_2015-04-22_at_5.22.53_pm.png

The BTC is projecting that the original tax cuts will cost the state about $1 billion this fiscal year and the next, while the new batch will tack on another $600 million or so loss this year and nearly $1.5 billion next year. 

This next graph, also taken from a BTC brief, lays it out: 


screen_shot_2015-04-22_at_5.48.05_pm.png


For 15 years, the state has averaged a 4.7 percent year-over-year revenue increase, because the economy is growing. Since the tax cuts, the state’s revenue growth has limped along—2.9 percent, 3.3 percent, and a projected 4.1 percent in fiscal year 2016-’17. Sure, the state’s coffers get a little bit fuller as the state and its economy grow, but the state’s expenses to keep up with that growth are increasing too, and the revenue growth isn’t keeping up.  

Again, from a relatively recent BTC report: 

Since the 2013 tax plan passed, revenue projections have been revised downward time and time again. In July 2013 when lawmakers passed the biennial budget, they anticipated having $21.35 billion available in general fund revenue in the current fiscal year. By July 2014 when lawmakers adjusted the second year budget, policymakers based their spending decisions on a revised and lower $21.08 billion in revenue. Current estimates now suggest that just $20.73 billion will be available this fiscal year which while more than what was actually available in FY 2013-14, is far less than was originally budgeted [before the tax cuts].

Moving forward, projected revenue growth for the next biennial budget cycle will continue to be constrained due to the economy and the 2013 tax plan. This will limit the ability of the state to make critical investments in core public services. A limited list of identified budget pressures—such as school enrollment growth—amounts to $448 million for FY 2015-16, roughly two-thirds of the current projected revenue growth of $679.8 million [ed. note: now, per Sen. Rucho, $780 million]. This means that policymakers are likely to face challenges in meeting ongoing commitments and will be unable to make progress towards replacing the worst of the cuts that have been made or pursuing new initiatives.

Again, year-over-year revenue growth is to be expected at this point in the recovery and does not mean that the state is experiencing a surplus. In fact, current levels of revenue growth are proving too sluggish to meet expectations meaning that policymakers face a current year shortfall and will be far more limited in their ability to reinvest in the next biennial budget.

This year the state expects to bring in $271 million less than it projected when the tax cuts were passed two years ago. Now, state analysts admit that SB 526 will cost upward of $7 billion over the next five years; Rucho and his fellow Laffer Curve devotees may not want to see it, but the Magic Tax Cut Fairy didn’t show up in the last two years, and won’t be around to make up the difference over the next five.  

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