Who’s right on jobs and Proposition 100

by Byron Schlomach, Ph.D.
Goldwater Institute
 
Proposition 100 supporters are touting estimates from economists at the University of Arizona and Arizona State University. They claim an 18 percent increase in the state’s sales tax would cost fewer jobs than the number of jobs that otherwise may be lost due to reductions in the government spending.

Let’s think about this. If the state economists are right, it means the more we tax and let government spend, the more jobs we’ll have. Well, let me get on that bandwagon! Let’s not stop at an 18 percent tax hike; let’s double the tax rate and government spending along with it. We’d get a whole lot more economic growth.

The absurdity of this tortured economic reasoning, based on a popular Depression-era theory, can be illustrated by looking at a photo of earth taken at night. If the state economists were right, North Korea would be more than a big, dark blot. North Korea and Cuba would outshine the world with their prosperity.

Last year the Goldwater Institute asked the independent Beacon Hill Institute at Suffolk University to estimate the economic impact if the state raised the sales tax. They found the state will lose 14,000 private sector jobs. 

So which should you believe, the models of the university economists or the Beacon Hill model?

Beacon Hill’s model is consistent with real world evidence, like North Korea and Cuba. New research based on real-world experience in the United States by eminent Harvard University economist Robert Barro indicates that reducing government spending does not hurt the economy but tax increases do. Current research highlighted by the San Francisco Federal Reserve Bank comes to a similar conclusion.

Arizonans have a choice. They can choose to believe Beacon Hill’s economic estimates, which is consistent with real world evidence, or they can choose to believe a prediction based on a theory that evidence contradicts. Modern empirical results make it clear that a tax increase will damage our economic growth.

Dr. Byron Schlomach is an economist and the director of the Center for Economic Prosperity at the Goldwater Institute.


Comments

  1. Delusional Bill says

    An increase in the sales tax will result in several things. First is an increase in the bureaucracy of the education establishment. The actual money that will go towards ‘educating’ students will be a blip on the radar screen. Passage merely ensures that those in charge of driving the education bus off the road get a reward for doing such a wonderful job.

    The second and more lasting impact will be on the burden that will be further placed on all citizens of the state. When government’s reach is extended through limits on freedoms or an increase in its ability to confiscate wealth, the citizens freedoms are diminished. The power to tax IS the power to destroy.

    I will close with a question. At what point do we have so much government controlling our lives that we can no longer call ourselves a free people?

  2. If government spending actually decreased unemployment, our national unemployment rate would not be at 9.7% currently.

    The teachers unions are spending a lot of money on radio and TV promoting Prop 100. Do you all think it will pass? Will the people of Arizona actually agree to pay more in taxes?

  3. Prop 100 supporters have signs all around town. The media will be supporting more taxes. Kids will be picked up at schools that are promoting more taxes. Tax advocates have successfully made this a campaign about K-12 education which couldn’t be farther from accurate.

    Maybe it exists, but I have not seen public advertising arguing against this tax. Apart from visitors to this site, relatively few Arizonans are getting clear information about why it is bad to raise taxes in Arizona. So, unless knowledgeable people talk to their neighbors in person, make their own signs, or create their own ads, this tax will be turned into law. Let’s not fail our own interests.

  4. But the thing is, the Tea Parties are strong here. TEA stands for Taxed Enough Already. Would people in Arizona be stupid enough to vote for another tax, when they are protesting increased taxes already?? To me that is illogical.

    However, the NEA us good as using children as a tool for increased taxes. I just wonder if people will fall for it….

  5. What is absurd is Schlomach claiming that the UA economist’s argument is that raising taxes leads to more jobs in all cases. What they are instead claiming is based on the specific instance of Arizona at the current time. Misrepresenting someone’s position this poorly shows how limited the counterargumemt really is.

    As to Beacon Hill and their STAMP model – it would be great to look at it so we can all see for ourselves what assumptions it is using. Unfortunately it is not described in enough detail anywhere to do so. Barring a disclosure of what the model actually is, it seems perfectly reasonable to simply view it as a black box software that simply give the answer ‘taxes bad’ in all situations.

  6. THe state expects to raise a BILLION on this puny nothing tax.

    That’s a big number, that’s a chunk of change. On just a wee, nobody will notice it’s gone penny.

    The closest analogy would be … alchemy?

  7. The teachers unions are spending a lot of money on radio and TV promoting Prop 100.
    ……..

    WHy aren’t they spending that on student education? If teachers unions have money to blow on poltical advertising and campaigning, then it’s not about “the children.”

    Education spending is busting the budget already and can’t produce academically solid students.

  8. Does anyone know if the teachers have agreed to forgo raises this year? Are they agreeing to pay for more of their healthcare benefits? What concessions have the teachers unions made to help our state deal with our budget shortfall?

  9. kralmajales says

    Whomever believes that the teachers unions are spending all the money this is completely ignoring that fact that businesses in this state are putting up the money for prop 100. Look at your mailers folks…paid for by the Chamber of Commerce! Those LIBERALS!!!!!

    Oh…and here is Vic Williams…your boy…
    saying why he proposes it in an op-ed to the freakin Explorer:

    http://www.explorernews.com/articles/2010/04/21/opinion/doc4bce3256cc36e262158438.txt

    What you and the Goldwater institute are spouting is just plain off and false.

    And by the way, contractors support this (see the list on prop 100 folks…im not lying…public safety groups, firemen, etc.).

    And yes…Doris…teachers have had to forego raises for a number of years now as the cuts get laid into them. And…furloughs…which are decreases in salary. AND…layoffs.

    Doris, thanks for you question. It is a good one. I hope I have helped answer it.

    And for the rest of ya, get a grip.

  10. kralmajales says

    And one more thing…ask some of your so called conservative candidates like Jonathan Paton why they haven’t signed up on http://www.axthetaxaz.com???? It is because they want to say they oppose it and do nothing to help. They are bought and paid for by the Chamber. And guess who the Chamber supports????????

    Guess??????

    Anyone?????

    PROP 100!!! with their member dues!

  11. kralmajales says

    Oh…and Jane…I hate to say this but the law specifically prohibits the use of public facilities nad public dollars to advocate for any kind of political cause. It is a gag order that prevent teachers from the same type of speech many of you get at your jobs.

    If they pass this…it is because the Chamber of Commerce helped enormously…the teachers worked on their own time and own dime, and because most parents don’t want what conservatives are peddling.

    Even the most important constituency of conservatives past (the Chamber) supports this and with their dough.

  12. James Davidson says

    Dr. Schlomach shows why the tax increase is dumb economically. It also is a moral disgrace. A sales tax hurts the poor and unemployed. Let’s say you are a construction worker now out of work for 52 weeks. The Governor wants to take more money from you to run state government. Isn’t she a peach?

    What does the endorsement of the Chamber of Commerce add to it? In my mind their support is a reason to vote no. If they really believed a tax increase was good for Arizona, which it isn’t, they would have supported a surcharge on high incomes. What’s the chance of that? At a minimum they would have supported a rebate of the sales tax increase for the poor, working poor, and unemployed.

    A sales tax increase in a recession is heartless. Thos of you who have posted here in support of it need to check your moral compasses. They’re out of whack.

  13. James Davidson
    Opposition to this measure that is due to the regressive nature of the sales tax with the alternative of raising higher income income taxes is certainly a valid argument and I am aware of many of the left who feel this way. However, the argument above neither shows that the measure is ‘dumb’ economically nor makes a moral case. I have read the reports by the UA economist and she is quite thorough in demonstrating why the estimates the Goldwater Institute paid for are incorrect, at least as much as one can with a model that is not publicly documented, as well as providing counter models that are documented, explained, and defended. Claiming North Korea and Cuba provide a counter to the well-documented argument by Dr. Charney’s is simply absurd on its face and is not even an argument regardless of the attempt to pepper it with links that don’t actually back up his claims.

  14. todd – Dr. Charney’s model may be “documented, explained, and defended’ but its output is at odds with with real world data. Their multiplier for government expenditures is twice that for tax cuts which is the opposite of what has actually been measured.

    For further details see my blog from last week.

    http://azecon.blogspot.com/2010/04/arguing-sales-tax-increase.html

  15. James Davidson says

    Todd:

    You really hurt my feelings associating my views with the Left. I gave that up years ago, when I left university and got real world experience.

    There is a huge moral case to be made against a sales tax increase. We are enjoined to help those who have the least amongst us. To my way of thinking, that command is not liberal, conservative, or in between. It is the duty of all men and women who walk the earth. I have been taught that precept as a moral value since before I went to kindergarten, both by instruction and by example.

    A sales tax increase hurts the least amongst us. I can never stand for that. I have to stand against it. I don’t know how anyone can do otherwise and look himself or herself in the mirror.

    Anyone who is content to take money from the poor, working poor, unemployed, and disabled to pay to the State of Arizona needs to do some introspection.

    On economic grounds, so you have a professor from the University of Arizona saying that a tax increase in bad times “creates or saves” more jobs than it will cost. Only a professor or a Liberal would believe that.

  16. James,

    It is true. Goldwater cooks its numbers and associates itself with studies that have little basis in empirical fact. They are easily torn apart by good analysts.

    I know the folks at Eller…they are not liberals. This is the business school folks. Its ok if you don’t want to believe facts. The only good argument you have is that without it govt will get more cuts, more govt. employee layoffs, the entire multiplier effect on small businesses that really on universities, schools and other agency spending.

    There is no question that this will destroy jobs. Conservatives dont care about that…it they are govt jobs.

    But the Chamber of Commerce knows all too well what this will do to our economy.

  17. Thanks for the answer to my question concerning the teachers. That helps.

    Here is my concern about Prop 100. If you raise taxes, how does this help our economy? Increased taxation means that citizens and business have less money in their pocket because they are paying more for government. Government does not create jobs, or wealth. The private sector does that. If you tax more, it diminishes growth. The money business would spend to hire and grow their businesses isn’t there, because they have to pay more in taxes.

    Look at New Jersey for example. They kept raising taxes, and their state is in serious financial trouble. The wealthy have left. Businesses have left. And the tax revenue, left with them. Is this what we want for Arizona? The problem is, our state is not making the necessary sacrifices in spending. Have we started, yes. But there is still a great deal of waste and inefficiency within. This needs to be addressed. And increasing our taxes will not solve the problem, but rather prolong it.

  18. James…

    Since you are against regressive taxes, then are you a fan of higher progressive income taxes and taxing business to a proportion that they receive in govt. benefits?

    I agree that it would be much more fair.

  19. Doris,

    Not sure what Kral said but the impact of the tax will not help the state…it will keep it from disaster. Yes, with one less cent of profit per dollar there is the opportunity for less spending. But without govt. infrastructure, and when taxes are as low as they are in this state (not sales taxes), the state looks much much less attractive for business and economic development. The biggest fallacy in the world is that businesses only look at taxes as a means of deciding where to locate. They look at schools, quality of life, transportation, public safety, and the ability of govt, non-profit, and other private partners to support a good business environment.

    My problem with this tax (like James) is that it is regressive, that it continues to base our revenue on the gamble that people will spend money here. When time are good, sales taxes produce revenue. When times are bad, you have complete disaster.

    We have some of the lowest property taxes, income taxes that keep getting lowered, and not so high business taxes too. The end result is that our infrastructure suffers dramatically.

    So, no, this won’t get us out of our mess. The Gov and legislative budget sees to that. This only keep the budget from being so much worse.

    Last, Doris, thank you for listening. You are indeed talking about theory that is often espoused (lower taxes equals growth and more revenue)…it doesn’t. It did not work with Reagan, Bush 1 or Bush 2. What you get in the end are enormous deficits or programs that cannot function.

  20. James Davidson says

    Roger,

    You make a common mistake. If State spending yields such a vaunted multiplier effect, Big Sis’s last budget, the real behemoth, would have left us all flush. Didn’t happen. Why not? That whopper had to be hacked before the year was out.

    Why would we have made the $2.0 billion in cuts that already made take place? By your logic, they would have crippled the State’s economy, and we should have raised taxes to avoid those cuts as well.

    Who cares what the Chamber of Commerce supports? The Country Clubbers are out for themselves. Not that I fault them, but it is a fact. Is it an accident that one of the biggest trade groups backing a sales tax increase is the contractors who do business with government. Again, not that I fault them, but who are they looking out for?

    I noticed you didn’t say a word about taxing the poor, the working poor, the unemployed, and the disabled to pay money to the State of Arizona. You may be good with that. Not me.

  21. Oh…and Doris. You said something else. You said that government does not create jobs or wealth. That is not true. Seriously.

    Where does Raytheon get its profits and money? Govt. It is a govt. contractor. It builds weapons paid for by tax dollars. And people are wealthy and engineers are hired and the spinoff of that technology has an impact on other businesses.

    The same is true with research and development spending. And well public schools with publicly paid teachers produce growth. So does a healthy public. So does a public that is protected by cops and firemen. All govt employees. All support an environment that is not provided by market incentive. We get less safety in a market, we get far far less national defense, we get less education, we get less of everything unless it generates a profit. Not all things we value in life do.

    Last, I dont want to have to go to the market and wonder if my food is safe when I buy meat. Inspector make sure that good meat producers are not undercut by bad ones that produce poor quality that gets people sick.

    I dont want taxes at 80% but we have some of the lowest taxes in the nation. I don’t like this sales tax at all. The gov is not wise. And it is an afront to her character and that of the legislature that they would pass a budget that hinges on more revenue…and then passes that responsibility to someone else.

  22. James Davidson says

    Roger,

    I am in favor of the poor, working poor, disabled, and unemployed paying nothing in income taxes. That essentially is the current model.

    For the rest of us, taxes are already too high.

    As for business, I generally see no reason to pay it any subsidies. Big Business and Big Government are sweethearts and have been since the progressive era. Recall that the federal government broke up Standard Oil and made Rockefeller way more money than he had before the break up.

  23. I told ya what I thought above James. And the multiplier effect is there. Big Sis did not create massive spending. That govt spending was cut before, over and over again by past govs and legislatures. She restored some of that spending…and as much as the more powerful GOP dominated legislature would allow her.

    The problem, as I mention to Doris, is that unlike other states we have very very low taxes in property and income. That is where stable revenues come from. The reason we are sucking air right now from a gaping chest wound is that we have gambled on low taxes to create growth. It didn’t. We also gambled on sales taxes…the only thing that can pass because the legislature wont let anything else pass. Sales taxes create a boom and bust. The few states like ours are in massive trouble. Others aren’t. Look at Florida. Sales tax laden, low taxes elsewhere…and massive massive deficts and cuts to things that most (except for here…) do not want to do without.

    I detest this tax increase. It is not fair, as you say. I detest that our legislature and our Governor would not do the responsible thing and create a fair tax structure.

    What I find a bit disengenous of you is that I know you support no taxes. I doubt you care a bit that these taxes hurt the poor. You certainly don’t appear to care that the poor will be harmed by this budget with the tax or without it.

    If I am wrong. Do tell me so, k?

  24. James…taxes are not to high here.. Compared to what?

    Our budget is among the lowest in the nation. Compared to what?

    And other states with higher taxes, higher budgets are kicking our tails.

    This budget is driving a lot of talented people from this state. It is driving our youth away as well.

    I once faced a brain drain in Appalachia. You do NOT want this. Even if you think you do…you do not.

  25. Oh yes, we do agree. Charles Lindbloom…great political scientist…demonstrated the privileged position of business in American politics and government. It is why the GOP has fought to keep them in their tent. And until recently, why the Dems usually did not work so well with them.

    Trust me on this. Without the business base, the GOP would be what the Whigs now are…a distant distant memory.

  26. Great talking with you.

  27. The government ALWAYS ends up spending more to do the same function at a lower level of competency than does the private sector. Schools are NO exception. Once the need to cover expenses and make a profit is removed, the level of effort diminishes and the number of bureaucrats to perform a function increases.
    It’s human nature, not the side that should be encouraged.

    In Missouri, a Federal judge ordered billions of the state’s budget to be redirected to Kansas City schools, on the grounds that people were fleeing Kansas City schools because they didn’t want to be in piss-poor schools with “black kids,”

    SO, the judge ordered a forced upgrade of only Kansas City schools. Rural schools serving lower income farm families closed, the state universities had to cut back, every county school in the state was negatively hit by this.

    Kansas City school administrations went on a building frenzy – state of the art mock courtrooms for HIGH SCHOOLS, olympic swimming pools, multi-media centers, on and on and on. They upped the teachers’ and administrators salaries.

    Total FAIL. EPIC fail. Same old teachers, same old crap curriculum, same old Union, just better paid for same old failing. Scores continued to FALL, and families continued to LEAVE, White AND Black. Two weeks ago, Kansas City school board announced they needed to close some of these expensive school edifices, not enough students … fleeing families.

    Handing more money to the SAME losing, hidebound administration is money down the drain.

  28. James Davidson says

    Roger,

    You are wrong. I do not support “no taxes” now and never have. We need government, but it must be limited government, which was the genius of the founders.

    I support low taxes, and I support exempting the poor, the working poor, the unemployed, and the disabled from paying any taxes to the extent it is possible to do so. As I wrote before, they pay essentially no income tax, and I’m fine with that. It is impossible to exempt them completely, because taxes are a cost of doing business and get folded into prices.

    You’re also wrong about Big Sis. Her last budget, passed with every Democrat vore in the Legislature and with enough Rinos to get to 31 and 16, was a pig bloat. As I wrote before, it collapsed before the year was out. Martin was not a chicken little. Big Sis was a Big Spender.

    Driving talented people from this state? Until the recession we drew talent from the finest universities in America. Driving youth away? To where?

    As for Appalachia, if I’m not mistaken, government benefits are part of the culture, no? The problems in that region have been cultural, no?

  29. James Davidson says

    Roger,

    Democrats usually did not work well with Big Business? You must be joking. FDR was the best friend Big Business ever had. Jimmy Douglas and he were great friends. Joseph Kennedy was his ambassador to Great Britain, until he started to sympathize too much with the Nazis. Lyndon Johnson did Big Oil’s work all his life, and he would have never left Texas without the help of Brown and Root, now known as Haliburton.

  30. I was told the other day that AZ was in the black … what in 2004?
    A significant chunk of the Napolitano deficit derives from the establishment of new entitlements to do with pre-school, daycare, teenage unwed mother supports, and the like.

    So, to someone who wasn’t in state when this happened, what is the reason AZ went from budget surplus to budget disaster in only 6 years?

  31. ……………
    James Davidson Says:
    April 23rd, 2010 at 10:48 am
    …………..

    The source of Al Gore, Jr’s family wealth before he enhanced it with Carbon Indulgences:
    Al Gore Sr,: Occidental Petroleum and Armand Hammer’s Soviet contracts

  32. Wanumba,

    The reason we went from Black to this kind of red could be explained by any finance person. We lowered taxes while spending…and our state relies heavily on sales taxes. Sales taxes are boom and bust in bad economies. What it does to budgets is what happened to us after 2001. The economy went belly up…sales go down…revenues plummet. State budgets were cut dramatically instead of balancing the tax system in this state. Napolitano restored that funding and yes created all day Kindergarten too. Something you will see that may people want and many many other states have.

    You can’t lay the blame for this economic crisis and the cuts to state budgets…and our extremely low spending state on some weirdo economic theory that proves time and again to be wrong.

    Cutting taxes does not equal growth…not if it is done to the extent that this state has cut infrastructure.

    Last, dont give me that crapola about govt waste being worse than corporate adn all that efficiency nonsense. Show me any corporation that is not wasteful…massively wasteful. Corps are bureaucracies too. And we used to not have to pay for them…but we do pay for them…try to get service and instead get waste.

  33. and dont attack the spending that Napolitano made without attacking your own pet projects. Ill give you a list of things that are more expensive. Tell me why you wont cut them?

    Corrections
    Border security
    Firemen
    Police
    National defense

    If you are a libertarian, I will let you slide and just say I disagree with you. But if you want to stop your antigov bs rhetoric and get to what you and I want to spend things on…now we are talking.

  34. James Davidson says

    Roger,

    “We lowered taxes while spending…”

    The spending? I agree with you. Big Sis turned out to be a Big Spender.

    Taxes? What taxes did Big Sis lower? The sales tax rate remained the same. She left marginal income tax rates alone.

    The only tax that I can think of — statewide equalization, and that only temporarily and while kicking and screaming. Guess what? It’s back.

  35. Byron Schlomach says

    I have two things to say to Get-a-Grip-Todd.

    First, read the article. I specifically refer to OTHER SOURCES besides the Beacon Hill model – sources of recent, empirical research. Todd, if you’re determined to ignore reality, that’s your business, but please don’t pretend to other people that reality is contained in an economic model. I don’t even believe that with respect to Beacon Hill’s model. That’s why I referred to current, empirical research which, as it happens, confirms Beacon Hill.

    Second, a rebuttal prepared by the Beacon Hill Institute is available here: http://www.goldwaterinstitute.org/article/4667. I would also point out that Beacon Hill’s model is every bit as accessible as any proprietary economic model, including the REMI model ASU economists relied upon last year.

  36. SO, the nut of it is that Napolitano added massive new entitlements to the Arizona budget. And the lobby for them is dug in and refuses any cuts. No compromise, must tax.

  37. roger Says:
    April 23rd, 2010 at 12:05 pm
    and dont attack the spending that Napolitano made without attacking your own pet projects. Ill give you a list of things that are more expensive. Tell me why you wont cut them?

    Corrections
    Border security
    Firemen
    Police
    National defense
    ………………..

    “Pet project” is all day kindergarten.

    It is trivial fluff next to the CONSTITUTIONAL duties of government to provide for security and for the common national defense.

    The fruit our education establishment:
    cognitive inability to distinguish frivolities from substance.

  38. An education establishment dereliction of duty in failing to teach every American student the US Constitution – to learn it by heart.

  39. Reality? I find that rich coming from someone who claims that the same model and reasoning which show the net positive results of a tax increase in this instance is the same that indicate Cuba should be a prosperous nation.

    I have found several papers which reference the lack of public information of this STAMP ‘model,’ so it is hardly the case that this is an isolated occurrence. I also have not found a single study from anyone outside of Beacon Hill which show this ‘model’ aligns with reality. I also note that they reference none in their rebuttal.

  40. wanumba. K-12 education is duty of government under the AZ state constitution. Maybe you should bother to read it.

  41. Napolitano EXPANDED the definition of that, didn’t she?

  42. Stephen Kohut says

    todd,

    No where in the state’s constitution does it say we have to spend 2x more then we should be. K-12 is a spending boondoggle that the left uses to beat on people with “it’s for the children”. Its for the featherbedded, unionized, disaster called K-12. It has nothing to do with the children short of an excuse to hire another government flunky and stick it to the taxpayer.

  43. Stephen Kohut,
    The constitution mandates the state’s responsibility to fund k-12 education. Your dubious claim about spending twice as much as needed is irrelevant to that fact.

  44. Stephen Kohut says

    todd,

    Fine, here is a buck. We the taxpayers will take back the other $4.5 billion that has been spent in 2010. Consider education funded per the state constitution.

  45. Yes Stephen, you sure are a clever one, aren’t you?

  46. All these references to “Teachers & Union(s)” & I thought this was a “right to work” state.

  47. #s 2, 7, & 42 ;o)

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