Sunday, March 4, 2007

Economic patriotism for Montana -- part II

Ed Kemmick put simultaneous responses on Mark Tokarski's website as well as on Montana Headlines, pointing out that our two sites had addressed the same Billings Gazette article on Gov. Schweitzer's and Corey Stapleton's comments about our tax and business climate.

Kemmick correctly pointed out that our views of these remarks were "180 degrees" apart, and expressed an interest in hearing our comments on the other's posts.

One can read Tokarski's post by clicking on the above link, and the Montana Headlines post with Tokarski's response in the comments section is just below, or here.

We were not capable of being as concise as was Tokarski, so are replying as a separate post here.

First, Mr. Tokarski mixes up two things that are intertwined but separate: indicators of economic prosperity (such as incomes and unemployment rates) and state government revenues.

What is at issue in this current legislative session is state government revenues, so that is what should be concentrated on.

There is no question, for instance, that energy prices and demand account for some of our current high tax revenues. But this is a separate issue from our economy. Are we to assume that a booming energy production industry is the reason that unemployment rates are low in Whitefish as well as in Sidney? Or that incomes have risen in places west of the Bighorn River?

Second, Tokarski, using a common Democratic argument, implies that the only reasons for Montana’s cyclical revenue collections are things like energy or commodity prices. It is true that commodity prices have a cyclical impact on our economy, but it cannot be avoided that what grossly magnifies the effects of these economic cycles on Montana’s tax revenues is our dependence on an income tax – something over which we do have control.

States without income taxes do not go through the kinds of cyclical crises that Montana does. The bottom line is that incomes (and hence income tax revenues) vary with broader economic cycles, but citizens own property and spend money at far more constant rates.

There are good reasons to avoid a sales tax (for instance, Billings draws a lot of income out of Wyoming because Montana doesn't have one) -- but if we insist on avoiding one, we'd better stay used to wide fluctuations in tax revenues.

As has been stated on Montana Headlines before, more is accomplished (including scoring political points) when there aren’t arguments over who gets credit for what. The main point to our previous post was not to claim sole Republican credit for favorable economic conditions or high tax revenues. It was rather to question whether the governor was attempting to use appeals to “helpfulness” as a way to silence Republicans who believe that lowering tax burdens yet more will help the state’s economy even more.

And as has also been stated on Montana Headlines before, Republican policies at the very least did not hurt the economy or hurt tax revenues. Republicans certainly can’t prove that it was only their policies, and not factors like energy prices and demand, that were responsible for Montana’s current favorable economic and revenue situation. But then, we’ve never heard them claim that they were.

Neither, though, can Democrats prove that Republican policies did absolutely nothing to help our economy or revenues, but yet we certainly hear Democrats making that assertion.

There is one point on which we would agree – namely that a good use of excess tax revenue is to plan ahead for days when revenues will be lean.

Democrats could propose that ongoing state spending rise only with inflation, and that no new employees or programs would be added. They could furthermore propose saving most excess revenues for a rainy day. With such a combination, a future Montana on the cyclical economic downswing wouldn't have to struggle to fund them.

While Republicans wouldn't share their economic pessimism, we would still probably find consensus on that plan. As long as Democrats continue to propose massive increases in government spending, however, we will assume that they aren't as worried about a future bust as they say they are.


Mark Tokarski said...

Well, there is certainly room for agreement here. We agree that a downturn is inevitable. We agree that the energy boom is at least in part fueling current prosperity. We agree on the concept of 'rainy day', though I'm at a loss to understand how keeping tax revenue down prepares us for that downturn.

We are at opposites as to how to deal with the boom side of the cycle. I say cash in; you seem to say cash out. When we are in boom, not much keeps investors away. With oil at $60, marginal prospects look very good, tax coffers are swelling with severance money. This may not affect Whitefish directly, but there is a ripple outward, and part of that ripple is provided by the tax mechanism, which spreads the benefits over the entire state.

The object in a boom is to grab as much revenue as possible - we want higher wages and tax collections. Republicans are anti-union, anti-tax. Your lone mechanism for spreading the benefits of boom time is the hope that investors will pay high wages to more workers. We're not against that - we only think in terms of broader and longer lasting benefits for all of us.

It appears that we agree that we cannot be sure that Republican tax incentives of the past have done any good. That was my point - it’s not supported by data. Its presumption - I can't prove a negative - the burden is on you - if you say that current prosperity relies on pasts tax cuts, document it. That’s what economists do, your side is not short in that profession. Let’s put a pencil to it.

By the way, I work with this income tax daily - if ever there was a shell game, that is it. The Martz 'reform' package shifted the burden down ward by introducing the top tax bracket to people making only $14,000. It also eliminated deductibility of federal taxes for high income taxpayers, leaving us with a system that taxes taxes. Few people were fooled by the 11% bracket, as deductibility of federal taxes brought that bracket down to its current 7% range. I don't see much reform there. I doubt many have been fooled by the Martz package.

Montana Headlines said...

Working backwards, we would agree that the income tax changes were a shell game, and were never intended to be anything but. They were supposed to be revenue neutral for the state (and as neutral as possible for individual taxpayers).

You are absolutely wrong that "few people were fooled by the 11% bracket." Maybe few people in Montana who are used to it were fooled. But how can anyone measure how many people looking for a place to locate in the past looked at that 11%, knew they made or were planning to make a lot of money, and just moved on without investigating further?

While every general group of taxpayers got a break, the higher income people got a bigger break -- and yet revenues went up. What I have never been able to understand is why Democrats are unable to see that paying less in taxes is a good thing in and of itself.

If revenues don't drop (they actually went up instead), why should anyone care -- other than out of a sense of punitive envy, that the people who are paying the most in taxes get the biggest breaks in a tax cut?

Why anyone would think that people who aren't paying much in taxes in the first place would get big tax cuts is difficult to understand. In 2004, 10% of Montana income tax payers paid 60% of the income tax revenues. Of course they will get the biggest tax cuts.

So -- how much is enough for the top ten percent to pay? 70%? 80%? 90? 100? Name your price -- and justify your number.

Which brings us back to your assertion -- namely that it is the Republicans' burden to show that tax cuts have "done any good." The main point to taxes is to get revenue for the state to provide necessary services. Montana's revenue collection has been there in spades -- whether in spite of or because of Republican policies really doesn't matter for the bottom line, does it?

A second good thing happened -- nearly every taxpayer paid less in taxes than they otherwise would have paid under the old plan. (We didn't, but that is another story, and you don't hear us complaining.) That is completely provable and if you work with it every day, then you know this is true.

So we are not in agreement that we cannot prove that the tax incentives did no good. Letting people keep their own money is good, and it is as provable as the nose on one's face.

We are in agreement that we cannot prove that the tax incentives caused revenues to swell more than they would have (although we think they probably did, due to the Laffer curve), and we cannot prove that the economy boomed more than it would have.

But why would Republicans need to prove that they did in order to justify letting people keep their own money?

Quite the contrary, we would maintain that Democrats have to prove that taking more of their citizens' money away from them would have such a profound positive effect on the economy and on state revenues that it makes raising taxes justifiable.

It all comes down to a fundamental erroneous presupposition, one that is engrained into people as a result of tax withholding: people don't see tax money as ever having been their own earnings. When it is deducted from a paycheck or incorporated into a mortgage payment, it is as though it never existed to them -- as though the question is how much of their money they get to keep, as opposed to how much of it they have to pay the government.

Finally -- I never asserted that keeping tax revenue down prepares for a downturn. I simply stated that if Democrats truly are concerned about a future bust (and you are claiming that Democrats are more concerned about that than we are), they would not propose increases in ongoing spending that Montanans during that future bust will struggle to fund.

You are at a loss to "understand how keeping tax revenue down prepares us" for a downturn (and this is before it is demonstrated that there would be an absolute decrease in revenue if property taxes are cut.)

We are at a loss for how putting new employees, programs, and ongoing spending in place prepares us for a future downturn.