A large body of scholarship shows tax, spending cuts pump the brakes on state economies

Tax cuts and reduced spending fail to spur economic growth, refuting a central argument by proponents of austerity, according to a comprehensive analysis of available scholarship published on August 18, 2020 by the Maine Center for Economic Policy.

“Decades of research show that budget cuts cannot generate economic growth, and will only pump the breaks on our recovery,” said Garrett Martin, executive director of the Maine Center for Economic Policy. “As policymakers respond to an economic crisis of a magnitude unseen since the Great Recession, it’s critical they recognize this fundamental truth about fiscal policy and the state’s economy.”

MECEP’s research review examines the impact of state-level tax cuts on state economies, including a comparative analysis of states that reduced individual income taxes and those that maintained or increased prior rates. The review finds the following:

  • Low-tax states fail to outperform higher-tax states. Higher tax states out-perform states without broad-based personal income taxes in terms of GDP growth, income growth, and employment.
  • LePage-era income tax cuts have not generated economic growth for Maine. Personal income tax cuts in Maine between 2012 and 2016 did not generate any noticeable change in Maine’s economy. Maine’s share of national private-sector jobs, personal income, and GDP in 2019 all were lower than in 2012.
  • ‘Millionaire taxes’ have little impact on millionaire migration and does not hurt state economies. Eight states have instituted millionaire taxes since 2008. The experiences of those states indicate the tax does little to spur millionaire out-migration, and don’t harm state economies.

The review also examines relevant research on the effect of spending cuts. It finds the following:

  • Cuts to public spending detract from economic growth. Spending cuts during the Great Recession reduced real GDP by roughly 1.2 percentage points.
  • Budget cuts usually harm schools and students. Public education is one of the largest components of state and local budgets, so spending cuts often include significant reductions to schools. Student achievement and per-student spending are linked, with cuts reflected in student outcomes.
  • Inequality grows as state spending declines. Income inequality grows when states rely on spending cuts during an economic crisis.

Click here to read the full research review.

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