In a forum for gubernatorial candidates early this week, I heard GOP candidate Tom Emmer extol tax reform efforts in Rhode Island as a possible model for encouraging economic development under an Emmer administration. In June, I wrote about the Rhode Island measure, pointing out its tax reforms were positive but any economic impact claims were unproven.
To hear such praise for the Rhode Island reforms, you'd think the nation's tiniest state was already on the way to recovery and worthy of emulation by our lawmakers.
In fact, Gov. Carcieri only signed the Rhode Island bill in June. About the only "measure" of its success so far is a declaration by the right-leaning Tax Foundation that Rhode Island now ranks 41st on its index of business tax climate, compared to 44th before the reforms passed. Minnesota ranks 43rd. (As of July, the Bureau of Labor Statistics reports Rhode Island's seasonally adjusted unemployment rate at 11.9%; Minnesota is at 6.8%.)
The Tax Foundation also said:
[Rhode Island] puts heavy reliance on the usual corporate giveaways through the tax code (job credits, research-and-development credits, investment credits, film credits, etc.). These programs are generally more about photo-ops and handouts to the politically connected than broad-based economic development.
In other words, a state that has resorted to cosmetic job creation measures in the past has marginally improved its low ranking on a scale that largely exists to browbeat states into favoring businesses in their tax codes. It's highly questionable whether we should emulate a state that has absolutely no track record of improved job results.
Lowering taxes as an economic development strategy may not fit reality, but it fits hardcore conservative ideology.
Also this week, Craig Westover published an op/ed that headed off in a similar direction. In criticizing proposals to raise the marginal income tax rate on the state's top earners, Westover says, and we don't disagree:
High wage earners tend to be individuals with unique skills and knowledge highly sought after in the marketplace. A nationally known college professor, a talented engineer, a successful school superintendent, a CEO with a proven track record, an entrepreneur with a great idea looking for a place to start a business — such people are highly mobile and can live and work just about anywhere they choose.
In fact, most economists would agree with his statement of economic theory. The problem, though, is they have a hard time finding a way to prove it in the real world.
As Westover says, "All other things being equal, they choose to work where net income (after taxes), not gross income, is competitive."
All other things are not equal. If they were, no state would have a reason to tinker with its tax code. And the North Dakota Dodgers might be playing the Pawtucket Red Sox in the World Series.
Growth & Justice has been studying the literature on tax studies that might shed a light on how much state taxes make a difference in fiscal policy and economic growth.
Watch for it this fall.
— Charlie Quimby