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Are tax cuts the answer?

To hear supporters tell it, tax cuts are the answer to all that ails Idaho and will launch a golden era of commerce and employment growth. But if you asked them for proof, they’d have a hard time finding it.

Idaho’s history tells a very different story. The simple truth is taxes pay for public services that benefit both businesses and households, and the vast majority of those services make people and businesses more productive. When we cut taxes, we starve that part of our economy. This is a good bargain only if the resources left in private hands are more productive than the resources taken from essential services. Our experience shows it’s a bad bargain.

Let’s look at what happened in the 1980s, when Idaho had difficulty meeting its needs during a severe recession. Instead of pursuing an all-cuts strategy, the governor and legislature made increased revenue part of the mix. They boosted the corporate income tax to 8 percent from 6.5 percent, the individual income tax to a top rate of 8.2 percent from 7.5 percent, and the sales tax to 5 percent from 3 percent. It was the reasonable thing to do.

The increases took place from 1983 to 1987. What followed over the next two decades is nothing short of amazing.

In late 1987, Idaho’s economy recovered from a nearly decade-long slump and put in motion economic growth that was robust year after year. We plowed through the nation’s 1990-91 recession as though it wasn’t happening. The boom only ended with the 2001 recession, and even then, Idaho’s economic dip was minor compared to most other states.

In stark contrast, in 2000, policymakers reversed course and began whittling away Idaho’s resources. The top individual income tax rate was reduced nearly to the pre-1987 level and the corporate income tax rate was cut to 7.6 percent. Property taxes for both homeowners and businesses were slashed. The grocery tax credit was boosted.

When the recession hit, the Gem State was briefly cushioned by reserves that had been built up from a 1-cent sales tax increase that lasted from 2003 to 2005. But when the money ran out, rather than learning from that experience and taking a balanced approach that included more revenue and not just cuts, policymakers went on a cutting spree, including the deepest reductions in public service jobs – in health care, transportation, higher education — in the nation.

So how’s it working for the economy? Not so well.

While job growth was robust during the two decades after taxes were raised, Idaho’s economy went into the ditch after taxes were cut.

Nonetheless, the governor set aside money in his latest budget for more tax cuts, and the House Committee on Revenue and Taxation has come up with a way to spend it. The plan would cut the top individual income tax rate to 7.4 percent from 7.8 percent and the corporate income tax rate to 7.4 percent from 7.6 percent, at a cost of $36 million.

Supporters say it will signal that Idaho is business-friendly. But it won’t. At best it will keep our state from regaining the substantial ground lost over the past few years. At worst, it could trigger more cuts for schools and colleges, job training and transportation – the very things that create a strong environment for job creation and make a state attractive to employers.

Mike Ferguson is director of the Idaho Center for Fiscal Policy, a program of the Mountain States Group, Inc., at http://idahocfp.org. He served as chief economist for the state of Idaho until September 2010.

About Mike Ferguson