Tax Cuts Do Not Pay For Themselves

A core part of Meg Whitman’s purported job creation plan is what she calls “targeted” tax cuts. And by targeted, Whitman actually means “for the rich.” She’s proposing to eliminate the state capital gains tax, which would mean that Whitman herself, and her billionaire buddies, would pay next to nothing in state taxes. The state, however, would lose billions of dollars in revenue.

This may sound like a crazy plan, but Meg Whitman isn’t the only politician calling for tax cuts for the wealthy and corporations – lawmakers in Sacramento push tax cuts with the claim that the cuts will increase economic activity, increase tax revenues and save the state’s economy. Lawmakers enthusiastically tout tax breaks, credits, exemptions and cuts as a cure-all for the state’s economic woes, despite the fact that there is little to no evidence that tax cuts and breaks create jobs.

The nonpartisan California Budget Project just released a new brief entitled “No Free Lunch: Tax Cuts Widen Budget Gaps” that analyzes the impact of tax cuts on the California economy. The CBP brief clearly explains how claims that tax cuts fuel economic growth are tenuous at best, and those cuts can do even worse damage to the economy by reducing state spending. The brief states that:

Revenues lost due to tax cuts would eventually require spending reductions, which would pull dollars out of the economy, reducing the benefits to the economy from tax cuts. States, unlike the federal government, must balance their budgets on an annual basis…. As a result, lower General Fund revenue collections due to tax cuts mean that the state has less money to spend and would have to reduce spending on public programs and services or, alternatively, raise taxes paid by other taxpayers in order to boost revenue collections. Reducing public services for tax cuts undermines the economic benefits that tax cuts are intended to generate. This is because state spending reductions disproportionately impact low-and middle-income Californians—such as teachers, child care providers, and in-home care workers—who spend most of their incomes locally.

The brief also found that the economic benefits of tax cuts are vastly overstated. For one, many of the benefits to companies from tax cuts end up going to other states and countries. There’s no constraints on what companies do with the money they save from tax cuts, so that money could go to fund operations in other states, buy equipment from overseas, or to line the pockets of out-of-state investors.

In addition, companies make location decisions based on a number of criteria, and taxes are just a small part of that. Criteria include the infrastructure, transportation, schools, access to a skilled workforce and university resources, weather, quality of life and a number of other conditions.

California has these qualities in abundance, yet the perpetual budget deficit and rounds of deep and devastating cuts to education, public safety and social safety net programs threaten to make the state less attractive to business. Turns out that if the state can’t afford to maintain roads, bridges, trains, schools and other critical state services, then businesses won’t want to business here. The state may always have good weather, but that doesn’t make up for the billions in devastating cuts to our once-great schools and universities.

As the CBP study outlines in detail, tax cuts only exacerbate the existing budget deficit and require more cuts to public programs. Not only that, but tax cuts do not bring the promised economic benefits many lawmakers, and Meg Whitman, promise. As the CBP states, “Tax cuts do not pay for themselves.” The people of California do. And we deserve better.