ALEC Lauds Tax Cutting States

Once again ALEC is pushing their discredited notion that tax cuts are a potent tool to promote state economic growth. While the preponderance of serious research indicates that cuts to a state’s income tax or its business taxes have little positive effect on a state’s economy, and may well prove harmful to the long term prospects for growth and for increased prosperity, ALEC continues to push their anti-tax anti-government agenda. The latest effort is their State Tax Cut Roundup for the 2015 legislative session.

ALEC lays out in this report their principles of good tax policy, based for the most part on standard economic principles of taxation (transparency, simplicity, neutrality, fairness, reliability, and revenue adequacy), plus the need for balance between state and local governments, and their favorite: pro-growth policies, or economic competitiveness. As in other ALEC reports on tax policy, however, the discussion here is exclusively on their notion of pro-growth tax policy – tax cuts of pretty much any variety. It is, after all, the Tax Cut Roundup, but there are no corresponding ALEC reports called the “State Tax Fairness Roundup” or the “State Tax Revenue Adequacy Roundup.”

The recent experience of Kansas should be caution enough against tax cutting as economic policy. For advocates of income tax cutting, Kansas was to be the poster child. Governor Sam Brownback signed legislation in 2012 slashing income taxes and cutting the state budget by over 13 percent. The tax cuts had been pushed by Stephen Moore and by Arthur Laffer, author of ALEC’s Rich States, Poor States, who argued they would provide an “immediate and lasting boost” to the economy. But instead of boosting the economy, Kansas GDP actually declined by 1.1 percent in 2013, the first year of the tax cuts, while nationally GDP grew at 1.3 percent. In 2014, Kansas growth once again lagged the nation, 1.4 percent versus 2.2 percent. Estimates for 2015 show the trend continuing, with state GDP growth expected to be just half of the national rate. Read more.

That the underlying ALEC agenda is to shift taxes from upper to lower income groups becomes clear when one contrasts their statement of tax fairness in the State Tax Cut Roundup with the tax policies they actually favor. The principle stated by ALEC is: “The government should not use the tax system to pick winners and losers in society, or unfairly shift the tax burden onto one class of citizens. The tax system should not be used to punish success or to “soak the rich,” engage in discriminatory or multiple taxation, nor should it be used to bestow special favors on any particular group of taxpayers.”

So how do ALEC’s policy prescriptions stack up against the concept of fairness? A state tax system that did not alter the distribution of income, as they supposedly favor, would be a proportional system: it would take the same percentage of income from every income group. However, most state tax systems are regressive: they take a larger percentage of income from lower income groups, because they are dominated by sales, excise and property taxes, and an income tax generally of only modest progressivity. Yet ALEC invariably applauds income tax cuts, which would make a state’s system more regressive, moving the state further from the goal of neutrality with respect to income distribution. Apparently shifting taxes from upper to lower income groups is the fair thing to do according to ALEC.

Grading the graders who grade the states —

‘Grading the States’ — — keeps an eye on business climate rankings

Visit the ‘Grading the States’ website for Peter Fisher’s reviews of rankings

IOWA CITY, Iowa — The veil is off state business climate rankings that purport — inaccurately — to identify policies that promote state economic growth.

The nonpartisan Iowa Policy Project (IPP) has launched “Grading the States,” a website that will offer ongoing critiques by IPP Research Director Peter Fisher of several prominent business climate studies.


Peter Fisher

“Grading the States” may be viewed at Fisher, an economist and emeritus professor at the University of Iowa, is the author of Grading Places: What do the Business Climate Rankings Really Tell Us? published by the Economic Policy Institute in 2005, with a second edition by Good Jobs First in 2013. The new website builds on this work and will allow continual updating as new rankings, and new research, become available.

“Too often, we see public officials relying on these rankings and the policy prescriptions they promote, when in fact the rankings have no predictive value for economic growth,” said Fisher. “This online resource will present the real story behind four prominent business climate reports — and at the same time show how states can promote long-term growth and prosperity that is broadly shared.”

The Iowa Policy Project is part of the Iowa Fiscal Partnership, a policy analysis collaboration of two nonpartisan, nonprofit organizations — IPP in Iowa City, and the Child & Family Policy Center in Des Moines.

“Across the years, we have continued to find profound problems in the way these business climate rankings are constructed,” Fisher said. “The measures that underlie the rankings often align with the ideology of the organization promoting the ranking, rather than research showing what may be important predictors of state economic success. The various measures, sometimes numbering over 100, are cobbled together into an index number that has no real meaning. As a result, we see wide disparity in the way various states are ranked. Most states can find a high ranking to brag about, and an alternative low one they can use to argue for drastic changes in state policy.”

While useful state rankings do exist, Fisher said, the four most prominent “business climate” rankings are best simply ignored.

“Their conclusions are at best meaningless,” Fisher said. “At worst, they actually lead states to adopt policies harmful to their long term growth.”

The new website includes reviews of the Small Business and Entrepreneurship Council’s Small Business Policy Index; the Tax Foundation’s State Business Tax Climate Index; the American Legislative Exchange Council’s Rich States, Poor States; and the Beacon Hill Institute’s State Competitiveness Report. “Grading the States” was created in collaboration with the Center on Budget and Policy Priorities. The site will be managed by the Iowa Policy Project.


Business climate rankings seldom make sense. Click image to see why.

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