Dave Helling: Do tax cuts cause growth?

07/17/2014 12:00 AM

07/16/2014 5:35 PM

Of the top eight states for private-sector job growth from May 2013 to May 2014, five have universities competing in the Big Sky Athletic Conference.

The evidence is clear: Gov. Sam Brownback could have dodged a headache by skipping tax cuts and prodding the University of Kansas into leaving the Big 12 Conference for the Big Sky. Jobs would have exploded in the state.

If you think that statement is silly – it is – you’ve sensed an important concept in politics and economics: There’s a big difference between causation and coincidence.

The Big Sky Conference didn’t cause job growth in those states. It’s just a coincidence.

Consider the theory of the Kansas income tax cuts.

“Low taxes may not be ‘magical,’” economist Stephen Moore recently wrote, “but they do seem to make places mighty attractive to millions of Americans who are voting with their feet” ( July 10 Opinion).

The evidence is mixed. Alaska, with no income or sales taxes, had the worst economic growth of any state last year. But let’s assume he is right, that people and jobs are growing in low-tax states.

Where’s the evidence low taxes caused that growth? Maybe tax rates and growth are merely coincidental, like growth and athletic conference membership.

If that also seems silly, try this experiment: Write down income tax rates in Kansas. Then write down the rates in Missouri, Colorado, Nebraska and Oklahoma.

Most people can’t. Most people have no idea what they pay in state taxes compared with other states.

Business owners may have a better sense of taxation, but even their location decisions are often driven by other factors.

Yet tax-cutting economists act as if differences in state taxes are the only reason for life decisions. They see growth in low-tax states and assume only tax rates explain it.

In the real world, people and jobs move into and out of states for all sorts of reasons. Sunshine. Schools. Recreation. Family and friends. Work. Taxes are a part of that equation, sure, but they’re not the only factor, and for most of us not the most important.

California’s top tax rate is more than double the top rate in Kansas, yet its economy grew slightly faster last year than the economy in the Sunflower State. At the same time, Kansas grew faster than Missouri.

Can you find a causal link there? Or are tax rates and growth just a coincidence?

Exploring that question helps explain why Brownback’s re-election bid is a toss-up.

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