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STAMP Provides a Good Guide to State Tax Policy

STAMP is based on textbook economics. States compete with each other for workers and business investment. So, if a state raises taxes, it diminishes its ability to create jobs and new investment. And this, in turn, diminishes the amount of new tax revenue that the state will be able to collect. STAMP incorporates and measures these effects.

 

 

By David G. Tuerck

Monday, March 8, 2004

BOSTON- Virginians face a raft of claims and counterclaims about the need to raise state taxes. The General Assembly will probably adopt one of three tax proposals (or some version of these) now under consideration. But which one? Proposals run from a modest increase aimed at preserving core services and the state's bond rating, to a much bigger one aimed at major upgrades in education and transportation.

The danger is that voters will get a pig in a poke, a hefty tax hike that offers the certainty of economic losses and only vague promises about economic gains. Or a tax hike that is more the result of get-even politics than of principled policy-making.

How to avoid such an outcome? The answer is to do what anyone would do before making a major purchase: Get objective, independent advice. No one would buy a used car solely on the promises of the salesman. Nor should the voters buy into a tax increase without understanding what that increase entails.
That's what the Thomas Jefferson Institute for Public Policy had in mind when it commissioned Boston's Beacon Hill Institute to build an economic model to assess the various tax proposals before the General Assembly. This model, called STAMP (for State Tax Analysis Modeling Program), has been applied to 20 other states.

STAMP is based on textbook economics. States compete with each other for workers and business investment. So, if a state raises taxes, it diminishes its ability to create jobs and new investment. And this, in turn, diminishes the amount of new tax revenue that the state will be able to collect. STAMP incorporates and measures these effects.

Second, STAMP takes into account the benefits of new government spending in those instances- but only those instances- in which economics has shown such benefits to exist. On this basis, STAMP treats government spending on roads and bridges as a benefit to the economy. On the other hand, there is little basis for claims that new government spending on education or other such programs yields tangible benefits to the economy. Such claims therefore find no place in STAMP.

If you look under the hood of some other economic models, you will find an assumption that government is inherently better than the private sector at creating jobs. STAMP makes no such assumption. STAMP also avoids the notion that the state can raise taxes on "businesses" without raising taxes on individuals. In STAMP there are no business taxes- just taxes that businesses pass on to their shareholders, workers, and customers, with identifiable, harmful consequences.

We used STAMP to scrutinize tax proposals sponsored by Governor Mark Warner, by the State Senate, and by the House of Delegates. The Governor and the Senate raise income taxes on high-income earners, the sales tax on nonfood items, and the cigarette tax. The Senate imposes a bigger tax hike on high-income earners and on cigarettes and increases transportation user taxes and fees. The House eliminates certain business "exemptions" under the sales tax and "offsets" under the personal income tax. The principal effects of each proposal, as identified by STAMP, appear in the table nearby.

BY SOME STANDARDS, the economic losses entailed by these proposals are small. The private-sector job losses associated with the Senate proposal, which is the most damaging of the three, amount to only one-half of 1 percent of the number of jobs that would otherwise exist. All three proposals create governmental jobs in 2005 that equal about half the private-sector jobs they destroy.

A job loss is not, however, just an economic abstraction when Virginia loses a skilled worker to a state with lower taxes. Or when Virginia businesses, singled out as lucrative and politically safe targets of higher taxes, shift their operations to other states.

To be sure, the question whether the economic losses associated with a tax hike represent tolerable collateral damage is, in the end, a political, not an economic one. And, thanks to the Thomas Jefferson Institute and modern technology, it is possible to identify the economic losses and gains. When you're looking for a used car, you can check its history on the Internet. And now you can do the same thing before buying someone's tax proposal (www.thomasjeffersoninst.org). Go to the Internet and see for yourself!

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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. dtuerck@beaconhill.org

This article appeared in the March 8, 2004 edition of the Richmond Time Dispatch.

 

 

   

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