originally published in the Moscow-Pullman Daily News March 3-4, 2007
By Judith L. Brown
Supply-side economics has burst suddenly into full bloom in Idaho, in the form of a sham research paper claiming that repealing the business personal property tax will stimulate blockbuster economic growth.
Supply-side economics burst onto the scene at the national level with Ronald Reagan in the 1980s and it's been around, in and out of favor, ever since. It hasn't been in play so much in Idaho. Until now.
Supply-side economic theory focuses on generating economic growth by increasing the supply of goods and services rather than by stimulating demand. Even as theory, supply-side economics is criticized for being based on the idea that supply creates its own demand, which is a fallacy.
For economic policy, supply siders focus on stimulating the supply side by decreasing business taxes and regulation. Taken to its illogical extreme, as it often is, it becomes a bogus "theory" claiming that cutting taxes generates so much economic activity that tax cuts pay for themselves: cut taxes and tax revenues increase. It sounds too good to be true. It is too good to be true.
Now, tax cuts have been in favor in Idaho over the recent past, but not necessarily supply-side tax cuts. The big tax cuts in 2000 and 2001 were more about "returning the people's money" than about supply-side economics. Some of those tax cuts went to families, mostly high-income families, and some went to businesses.
Then expansion of the homeowner's exemption last year shifted about $48 million of property tax burden from homeowners back onto businesses. This was a much-needed rebalancing of tax burdens between homeowners and businesses, solidly supported by credible analysis.
Nonetheless, expanding the homeowner's exemption left Idaho's big business lobby, the Idaho Association of Commerce and Industry, hoppin' mad. So IACI more than got even at last August's special session of the Legislature, which repealed the maintenance and operations property tax levy for public schools and increased the sales tax rate to 6 cents. Overall, this was a tax cut of about $60 million for businesses and a tax increase of about $10 million for families.
Still, this was not enough to satisfy greedy IACI. Now, it wants to go a step further and repeal the business personal property tax, a huge tax cut just for business of about $100 million.
This is where the sham study comes in. Titled "Effect of Repeal of the Idaho Personal Property Tax for Business Equipment On the Level of Incomes and Employment of Idaho Residents and the Gross and Net Effect on State Tax Revenue," it was prepared for IACI by Stephen J. Entin, director of the Institute for Research on the Economics of Taxation.
The Institute for Research on the Economics of Taxation is loosely affiliated with the ultra-conservative Heritage Foundation. Its homepage says it is "dedicated to the belief that constructive, free-market economic policies are essential for the nation's economic progress, and that the private sector is the principal engine of economic growth" - i.e., supply-side economics.
It wouldn't be so bad if this were serious, academic-quality research. It isn't. Halfway through the paper — far enough along that most noneconomists will have fallen asleep — Entin states that although the standard labor response in their national work is 0.3, he is assuming an elasticity of 1.0 for the state. I know this is pretty esoteric economics, but blithely bumping an elasticity from 0.3 to 1.0 without any empirical justification is what lifts this study from the real world to la-la land. This is economics as ideology.
So what are the implications of enacting policy based on sham research? It over-estimates economic growth and under-estimates the lost tax revenues. Hence there is no serious discussion going on of how to make up the lost tax revenues.
If Idaho's businesses find the business personal property tax objectionable, then perhaps it should be repealed and — this is the critical point — paid for by also repealing, for example, Idaho's investment tax credits or the production exemption. Some claim the business personal property tax is difficult to administer. Likewise the investment tax credits and the production exemption are full of loopholes. Overall, such changes could simplify the tax system and make it better.
Now that would take us back to tax policy discussions in the real world, with our feet planted firmly on the ground. Can you hear IACI saying "over my dead body?"
* Judith L. Brown is an economist and director of the Idaho Center on Budget and Tax Policy. She lives in Moscow with her family and can be reached at jlbrown@turbonet.com.