Study suggests income tax cuts are a poor tool to spur job growth

Last week, the Center on Budget and Policy Priorities issued a report entitled “Cutting State Personal Income Taxes Won’t Help Small Businesses Create Jobs and May Harm State Economies.”

As the title suggests, the report offers powerful new evidence that Governor Kasich’s proposal to further reduce Ohio’s personal income tax is a misguided approach to job creation. The author compiles years worth of research studies looking at the connection between income taxes and job creation. Included among the report’s findings:

  • Cutting income taxes to spur economic growth is a zero-sum game. Its authors note that “if a tax cut for households is matched with a commensurate cut in state spending to keep budgets in balance, then state employees or employees of state contractors may lose their jobs or will have less money to spend in local stores.”  In other word, a dollar may enter the economy via businesses through lower taxes, or through employment of public workers engaged in serving the public. But it’s not a new dollar.
  • Business do not choose among states based on tax rates. Tax cut supporters frequently claim that a lower income tax rate will attract “job creators.” According to the analysis, however, there is absolutely no link between income taxes levels and the decisions of people in a state to start a business or to relocate to another state.
  • Motivating businesses is not best achieved through income tax rates. That is in part because, as the report notes, “only about one-seventh of all individual taxpayers are owners of active, small businesses.” Fewer than three percent of all taxpayers report business income and employees.
  • Demand for a business’ product is the primary driver of hiring, not taxes. While innovative start-up firms account for most small business creation, personal income tax cuts are unlikely to benefit many of them because “these firms spend so heavily on new equipment, product development, and marketing that they have relatively little taxable profit in their early years.”

What policies do create jobs and stimulates economic growth, according to the report? Effective, quality government services, especially education and infrastructure, to economic growth. If lawmakers really wants to grow Ohio’s economy, they should stop starving schools and local governments of the resources they need to effective in order to provide another income tax cut that will primarily benefit the wealthy.