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“Starve the Beast” – Discount taxes and increase jobs by 18,000

In the Public Interest

June 3, 2010
Chronicle GUEST VIEW By Deborah D. Thornton
In Governor Culver’s proposed FY2011 budget, a comprehensive review of the state government found $341 million in government inefficiencies. The most effective way to curb these structural inefficiencies (estimated at 6.4 percent of the FY2011 budget) is to “starve the beast” by not making revenues available in the first place. Whether or not taxes are raised or programs cut, structural inefficiencies should be eliminated. Iowans for Discounted Taxes! (IDT) argues that the elimination of inefficiencies demonstrates that Iowa can afford tax relief in the form of across the board “tax discounts” for citizens. The tax discount would work similar to discounts at retail stores. A six percent sales tax on a $100 item would yield $6 in sales tax revenue, but a ten percent sales tax discount (6% - (10% x 6%) = 5.4%) would yield at the rate of 5.4 percent and $5.40 in sales tax revenue.

The Beacon Hill Institute at Suffolk University (BHI), at the request of IDT, analyzed the fiscal and economic impact of tax discounts. The proposed tax discounts of five, ten, and 15 percent would reduce the overall tax burden and put money into the pockets of Iowa’s taxpayers and businesses, boost the state’s private economy and lead to an increase in employment, income, and investment.

A tax discount of five percent would lead to a net increase of 7,352 jobs, which would boost disposable income by $540 million, or $60.65 per capita. Businesses would increase investment by $118.20 million. A 15 percent tax discount would lead to a larger net job creation of 18,714, a $349.43 million increase in investment and an increase in disposable income of $152.19 per capita. The ten-percent tax discount would result in changes that fall between the other two discount levels.

A reduction in the sales tax by five percent enables cheaper prices for goods; thus, at the margin, more goods would be sold, increasing the sales tax base. Moreover, the increased economic activity would also raise incomes, which would, in turn, boost personal income tax collections. At the five-percent discount rate the revenue loss would be only $179.41 million. The dynamic effects would shrink the loss to $165.94 million. The ten-percent tax discount would result in a 5.42 percent decrease in state taxes, or $372.04 million. The 15 percent discount would lead to an 8.17 percent decrease, or $561.30 million revenue loss.

Current economic circumstances, with high and increasing unemployment, suggest the immediate implementation of a 15 percent discount on income and sales taxes. This would create the largest number of jobs, grow the Iowa economy, and provide relief to taxpayers. Over 18,000 Iowans will have new jobs. They will no longer draw unemployment checks, but will contribute positively to the economy.

As Governor Culver’s FY2011 state budget shows there are at least $341 million in inefficiencies and overspending in state government. These cuts can be made with no negative result to the citizens receiving services. The legitimate and doable spending cuts proposed by the Republican Legislators, and ignored by the majority Democrats, during the just-ended 2010 session were more than double that amount.

Whichever states begin discounting taxes will have the advantage in maintaining current residents and businesses, and in attracting new ones to grow their economies and tax bases. The elimination of $341 million in inefficient government spending implies that when the economy rebounds, there will be excess revenue, and thus room to discount taxes. If Iowa lawmakers implemented an across-the-board ten percent discount in the state personal income and sales tax, the combined revenue loss would be $372.04 million. Thus, Iowa’s state and local governments can afford to implement a ten-percent tax discount, with little change in services provided.

The views expressed in this column are those of the author and not necessarily those of the Public Interest Institute. They are brought to you in the interest of a better informed citizenry.

Deborah D. Thornton is a research analyst at the Public Interest Institute in Mount Pleasant.



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