If you were making a list of things that go together… peas and carrots, Batman and Robin, peanut butter and jelly… you’d be safe adding 'Republicans and tax cuts' to that list. So it's not surprising that one of the more substantive policy areas in the GOP gubernatorial primary is about cutting taxes -- how much, which ones, and what impact will be felt.
And the similarity in the plans of Steve Poizner and Meg Whitman lies in an embrace of the core belief of supply side economics -- that cutting taxes makes revenues go up.
That's the focus of this morning's story on The California Report.
Setting aside for a moment the economic theory behind tax cuts and government revenues, what's particularly noteworthy is how each campaign is reacting to a rather basic question (posed both by me and, no doubt, other journalists): what does your tax cut plan cost the state in the short run? In other words, even if there's a substantial stimulative effect on the economy by cutting taxes, isn't there still an amount by which currently anticipated tax revenues will go down?
Granted, neither candidate's policy team wants to focus on this question. It's certainly not great politics to start promising less money for an already bleeding state budget, but they say it's also not the right policy debate. Both Team Poizner and Team Whitman insist that the any proper analysis of their respective plans takes into account a dynamic economic model, one that realizes that no action exists in isolation.
Even so, Whitman and her advisors acknowledge at least an estimate of the revenues that will, at least in principle, decline. The former eBay CEO's tax cut plan -- mostly business oriented tax breaks plus a dramatic scrapping of the state's capital gains tax -- could cost between $4 billion and $6 billion in a purely static (isolated) sense. But the candidate, in a brief chat at last month's GOP convention, said the stimulus effect won't lag far behind.
"My view is that within the first year we will make that up," said Whitman, "and then we will have started the hiring engine going, bringing down unemployment, cutting expenses, and then we go forward."
On Steve Poizner's '10-10-10' tax cut plan, there's no comparable revenue number; and it appears that's because there's no comparable analysis. Poizner's 10% cut in personal income taxes, corporate taxes, and sales taxes -- with a 50% reduction in the capital gains tax thrown in for good measure -- was apparently not crafted using California economic data. Instead, Poizner and his advisors say they examined data from 12 states that cut one of those big three taxes over a 14-year period. That analysis led his campaign to assign a projected percentage growth of overall state revenues of 1.77% in year one, growing to a 4.99% revenue increase in the final year of a Poizner first term as governor.
Poizner was quizzed about the lack of data on actual cuts in existing revenue after last month's gubernatorial debate by, in particular, me.
"You watch what happens," he said near the end of the discussion. "Tax revenues will go up, not down, if you make California more competitive in this global economy."
Nonetheless, it's hard not to want to examine what amount of currently anticipated tax revenues will disappear under the Poizner plan. If you take, for example, the most recent (albeit a bit dated) sales tax data, a 10% cut would seem to cost about $4 billion bucks. A corporate tax cut of 10% could translate into almost $1 billion less revenue. Personal income taxes are more complicated, as are capital gains taxes... but given the year and conditions, it's not inconceivable that the Poizner plan would eliminate close to $10 billion in normally expected revenues. And yet, the Poizner campaign believes the impact of the candidate's tax cut in year 1 alone would be $1.56 billion in additional revenue.
So what do economists think of the supply side tax cuts proposals? Depends on which ones you ask. Granted, the number of supply side skeptics seems to outnumber believers, but even a more nuanced reaction seems to cast doubt on anything more than a zero-sum game... that is, tax cuts that do more than just break even.
"We generally don't think the response is strong enough to provide this kind of complete offset," said Alan Auerbach, UC Berkeley economist and director of the university's Center for Tax Policy and Public Finance. Auerbach says thinking of tax cuts as a way to grow revenue is actually the wrong approach. Instead, he says, they should be enacted because they're the right thing to do -- regardless of impact. "After all," he said, "there could be tax increases of other kinds that may be better taxes to have than the taxes you cut."
Taxes and the California economy were also the focus of an Assembly Budget Committee hearing last week, where the economists assembled expressed other reservations. Most vocal was economist Steven Levy, director of the Center for the Continuing Study of the California Economy. Levy described a phenomenon he calls 'race to the bottom,' where states try to outdo one another on business tax cuts in order to entice more operations to set up shop inside their borders.
"We make a tax cut, they make a tax cut, we make a tax cut, they make a tax cut," he told the committee. "At the end, not much location has changed, and we've transferred money from the public sector...to the private sector."
And on the importance of tax rates, Jed Kolko of the Public Policy Institute of California said this: "Taxes do have a modest effect on where businesses and people tend to locate. But typically, other factors matter more."
None of the economists were speaking specifically about gubernatorial tax proposals, but the comments do shed some light on the complexity of the California economy and how much influence government officials actually have.
One final thought: if a tax cut proposal turns out to come up short, it's not going to be easy to scrap. Remember, a tax cut can be approved by a simple majority vote in the Capitol, but the rescinding of a tax cut is actually treated as a tax increase... which means a two thirds vote in each house of the Legislature.