Opinion Editorial 8/24/03 from The Birmingham News

by David G. Tuerck

Professors from the University of Alabama and some editorialists have challenged findings by the Beacon Hill Institute that a proposed billion-dollar tax hike would inflict substantial harm on the state economy. We would like to explain why our critics are wrong and why our warnings cannot be ignored.

The Alabama Policy Institute contacted us in June 2001 regarding the construction of a State Tax Analysis Modeling Program for Alabama. API was working on various ideas for tax reform and wanted a state-of-the-art computer methodology that would permit it to evaluate the economic impact of various tax reform ideas. STAMP provides that methodology.

Alabama STAMP is similar to models we have built for some 25 states and cities, including Mobile, where it proved useful to officials in forging municipal tax policy. Just before 9/11, Mayor Rudy Giuliani cited results from our New York City STAMP as proof of the job-creating effects of his tax policies.

API offered use of Alabama STAMP to Campaign for Alabama in December 2002 and again in January 2003. API wanted to help in the development of a tax reform plan that would make taxes fairer and raise the revenue needed with the least economic harm.

By using the model, Campaign for Alabama could have tested various ideas to determine the best course to follow. But Campaign for Alabama officials ignored API's offer. As a result, they proceeded with the development of a tax increase that, if approved, would significantly weaken Alabama's economy.

Costly plan :

Had they taken advantage of API's offer, they would have known that full implementation of their proposal in 2004 would cost the state about 24,000 jobs, $331 million in business investment and $2.3 billion in inflation-adjusted disposable income. Eighty-three percent of Alabama families would lose ground economically.

Why such high losses? According to our index of competitiveness, Alabama ranks 43rd among the 50 states, ahead of Mississippi but behind Georgia and Florida, both of which avoided broad-based tax hikes this year. A massive tax increase of the kind at issue here would only worsen Alabama's ability to compete for workers and business capital.

Despite this logic, the reaction to our study by proponents of the tax proposal was predictably hostile. Rather than use our findings to rethink the proposal and fashion a less-harmful method of solving the budget crisis, proponents circled the wagons.

A professor from the University of Alabama accused us of making "erroneous assumptions." Gazing into his crystal ball, he claimed that we overestimated future job growth and that we failed to anticipate increased education spending. Tax-hike proponents gleefully seized upon his criticism as proof of "flawed data."

What they didn't say is that this professor's comments amounted to nothing more than speculation about future developments that make little difference to the ultimate effects of the tax hike. Reducing our projected job growth by one-third reduces the long-term estimated job loss by only 5 percent. Putting more of the new money into education makes a correspondingly small difference.

The bottom line remains the same: This tax increase would have a substantial negative economic impact. This perspective is supported not only by our model, but also by the Joint Economic Committee for the U.S. Congress, which found that every $1 in new taxes costs the economy $1.40.

Then there is a University of Alabama study claiming that the tax hike would actually benefit the state economy, creating some 10,000 new jobs. Do you believe this? If you do, then ask the authors how many new jobs the state could create by doubling the tax hike. Using their methodology, the answer would be 20,000 new jobs. In other words, the state could tax itself to prosperity by simply taking every last nickel of personal income and running it through the state bureaucracy.

No free lunch:

The authors of this study should - and presumably do - know better. Government spending is not a free lunch. It diverts resources from other uses and creates disincentives to work and invest.

The criticism hurled at our work has every character of academic veneer, applied to a poorly conceived proposal in order to conceal the underlying flaws. The tax increase would reduce jobs and investment, just as common sense, as well as serious economic analysis, indicates. No amount of spin, coming as it does from a tax-dependent state institution, can change these facts.

David G. Tuerck, PhD, is chairman and professor of Economics at Suffolk University where he also serves as Executive Director of the Beacon Hill Institute for Public Policy Research.

This article appeared in the August 24, 2003 edition of the Birmingham (AL) News.

Posted: Tuesday, January 30, 2007 12:31 PM

Format revised on May 12, 2005 12:26 PM