Dr. McGuire: Research shows no conclusive link between taxes, economic growth

Dr. McGuire: Research shows no conclusive link between taxes, economic growth

Academic research shows no conclusive link between a state’s taxes and its economic growth, Northwestern University tax expert Therese McGuire told those in attendance at a Wednesdaypresentation sponsored by OpenSky Policy Institute.

McGuire spoke to a full room at the State Capitol that included about 15 state senators, several candidates and other state and local leaders. McGuire’s presentation came on the first day of a legislative session that will focus heavily on taxes.

“The evidence of a link between the levels of state taxes and state economic growth is weak; too weak … to believe that cutting taxes with the goal of boosting economic growth is likely to be an effective policy play,” McGuire said.

Nebraska is a case study in how state and local taxes have little to do with economic growth, said Renee Fry, OpenSky’s executive director.

“Our economy outperforms most states without income taxes and most of our neighboring states that have lower income taxes,” Fry said, noting that recent research shows income tax cuts in Nebraska would not benefit most Nebraskans, would send large sums of money to out-of-state residents and the federal government, and would not grow the economy.

In her discussion, McGuire also noted that businesses are more interested in tax certainty than tax rates.

“Businesses want to know what your tax system is going to look like years down the road,” McGuire said.

Lawmakers should consider the uncertainty their policy changes may create when they look to make tax changes, McGuire said.

Cash reserves meant for one-time use

McGuire also noted that state cash reserves should not be used to fund ongoing expenditures or tax cuts and that bond rating agencies like to see well-funded cash reserves.

States that want to grow economies would be better served focusing on making sure the state’s tax system is stable and can adequately support the functions of government that are most important to a vibrant economy, such as roads, schools, and health care, McGuire said.

View a downloadable PDF of Dr. McGuire’s PowerPoint presentation.