Corporate lobbyists and right-wing legislators of the American Legislative Exchange Council (ALEC) will be gathering in Washington, DC today for ALEC’s annual States and Nation Policy Summit. Today also marks the release of an in-depth report on the failure of ALEC’s economic recommendations for the states. The report claims that “states that were rated higher on ALEC’s Economic Outlook Ranking in 2007,” the first year the ranking was published, “have actually been doing worse economically in the years since, while the less a state conformed with ALEC policies the better off it was.”
The critical report, Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity, was published today by the non-partisan non-profit organizations Good Jobs First (GJF) and the Iowa Policy Project (IPP), both of which promote public policy fostering economic opportunity and smart growth for states.
ALEC’s economic policies are largely the brainchild of the “father of supply-side economics,” Arthur Laffer, promulgated with the release of the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index (RSPS) report. The most recent (fifth) edition was published in July 2012.
ALEC’s and Laffer’s recommendations to promote economic growth include the reduction or abolition of progressive taxes, fewer investments in education and other public services, a smaller social safety net, and weaker or non-existent unions. As economists at Economic Opportunity Institute have pointed out, “Laffer’s analysis fails to examine whether states are able to deliver on their basic duties for their residents — like maintaining good infrastructure, supporting strong schools and higher education opportunities, or securing public safety.”
The 2012 RSPS report argues that lowering state and local taxes produces job growth because, when tax rates rise, “the total cost to a firm of employing a person goes up, but the net payment received by the person goes down.” The report largely boils job growth down to competition between each state and its neighbors, arguing that businesses and individuals move from states with higher tax rates to states with lower. It adds, “If A and B are two locations, and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A,” a simplistic conditional statement based on the assumption that taxes are the only factor business owners consider when contemplating a relocation, but firms take many factors into account.
According to the Selling Snake Oil report, “all state and local taxes on businesses combined (corporate and individual income taxes, sales taxes, local property taxes) represent only about 1.8 percent of total business costs on average for all states.” As a consequence, “[s]uch a small change in the cost calculus facing a business cannot be expected to change any significant share of site location choices.”
Moreover, the Selling Snake Oil report contends that “businesses take many factors into account when making an investment location decision: access to markets and to suppliers; transportation costs; access to a pool of labor with appropriate education and skills; wage rates; energy costs; occupancy costs (to buy or lease space); access to supporting business services; the quality of local schools, recreational amenities, climate and other amenities important in attracting and keeping skilled labor; proximity to university research facilities; quality of state and local government services and fiscal stability of government.”
ALEC and Laffer are following a “beggar-thy-neighbor strategy” instead of a robust strategy to “focus on how to increase investment, public and private, how to strengthen labor productivity through education, or how to maintain an economy at full employment with a healthy labor force.”
The Laughable “Laffer Curve”
One of the RSPS report’s main tenets is called the “Laffer curve”: the theory that, “within what is referred to as the ‘normal range,’ an increase in tax rates will lead to an increase in tax revenues,” but that, “at some point, . . . higher tax rates become counterproductive. Above this point, called the ‘prohibitive range,’ an increase in tax rates leads to a reduction in tax revenues and vice versa.”
The term “Laffer curve” was allegedly coined after Laffer sketched his idea for Dick Cheney on a napkin during a dinner meeting in 1974 along with then-Wall Street Journal editor Jude Wanniski and Donald Rumsfeld, although Laffer himself claims not to remember the napkin.
The Selling Snake Oil report suggests that “[t]here are so many things wrong” with this napkin sketch, which has since been fleshed out in many texts, that “it is difficult to know where to begin.” First, “Laffer provides no empirical evidence showing at what tax rate the curve starts to bend back”; “Laffer’s curve also lacks any nuance or complexity; and “[f]inally, there is no guarantee that the fundamental premise is even true; a tax equal to 100 percent of the price of, say, cigarettes, is quite feasible, and would generate a great deal of revenue. Those addicted to cigarettes would still buy them, even if the tax effectively doubles the price.”
The Laffer curve supposedly applies to state taxation of business, but since Laffer first sketched the napkin, state tax rates on the income of businesses and individuals have dropped to the single digits and in many states the majority of firms pay little or no taxes.
Right to Work for Less
According to the RSPS report, “states that have right-to-work laws grow faster than states with forced unionism.” As the Center for Media and Democracy (CMD) has reported, Right to Work (RTW) laws weaken unions by allowing members to opt out of paying dues. Right to Work laws have been used effectively in the South to bust unions and keep wages low.
According to an Economic Policy Institute briefing paper cited in Selling Snake Oil, “controlling for differences in the cost of living, demographics, job characteristics, education of the workforce, and other factors, it was found that in RTW states, compared to free-bargaining (non-RTW) states, wages are 3.2 percent lower, a smaller percentage of workers (by 2.6 percentage points) have employer-sponsored health insurance, and the percent of workers with employer-sponsored pensions is 4.8 percentage points lower.” No wonder these laws have been dubbed “Right to Work for Less” by opponents.
Laffer’s “Richest” State, Utah, Suffers “Unaccountable Harm”
The state the RSPS report ranks as number one for economic outlook and number twelve for economic performance is Utah, due to its low top marginal corporate and personal income tax rates, flat tax, lack of estate tax, low state minimum wage, and Right to Work law. But the price of these policies has been high. Per capita income in Utah has averaged 44th out of 50 states from 2007 to 2011. Growth in that per capita income ranked 43rd. And its poverty rate increased by 39 percent over that time period, the fourth highest increase in the states.
That is a situation no state would want to emulate.