Evaluating effects of tax credits


By David G. Tuerck
Executive Director, BHI


Letter to the Editor - Texas Journal

Your article of Feb. 10 (“State Alters Analysis of Tax Cuts”) reported that our analysis of proposed research-and-development credit showed that the credit would have almost no effect on Texas job creation. On the other hand, Standard & Poor’s DRI found that the same tax credit would create 9,450 jobs by the year 2005.

DRI presumably saw as impressive a tax cut that would increase jobs by about 0.1% over the next six years, an increment so small it wouldn’t be recognizable in the monthly job statistics.

DRI said it considered more than 200 variables. We examined the variables (about 60 in all) needed to determine how the tax credit and other tax changes would affect the Texas economy. Adding more variables would have lessened confidence in the results

For people interested in counting variables, our assumptions and findings are open to public scrutiny. More important, though, is our track record in assessing tax policy.

Consider a 1995 DRI study commissioned by a large Massachusetts defense contractor. DRI predicted that a proposed state tax break for defense manufacturers would create thousands of new jobs. We disagreed, saying that limiting a tax break to this one group of producers (or even extending it, as the legislature eventually did, to all state manufacturers) would destroy jobs.

What has happened? Since January 1996, while Massachusetts has outperformed the rest of the country in overall job creation, it has lagged behind the U.S. in both manufacturing and defense-manufacturing job creation. Massachusetts has lost about 2000 jobs in manufacturing and about 3000 jobs in defense, close to what we predicted in our analysis.

We understand Gov. Bush’s support for tax credit as a way of increasing state competitiveness. But, as our analysis shows, Texas can achieve far more economic expansion through across-the-board reductions in sales and property taxes than through “targeted” tax cuts of this kind.

David G. Tuerck
Executive Director
Beacon Hill Institute