EXPERT AVAILABLE: Negative Economic Effects from Public Service Cuts Could Outweigh Economic Gains from Tax Cuts, MU Expert Says

September 25th, 2013

The views and opinions expressed in this “for expert comment” release are based on research and/or opinions of the researcher(s) and/or faculty member(s) and do not reflect the University’s official stance.

COLUMBIA, Mo. ­— Many advocates for economic development argue that income tax cuts for individuals and businesses will stimulate in-state economic activity while making the state more competitive with companies seeking to expand or relocate from elsewhere. Discussions about potential tax cuts generally are framed in terms of the economic benefits that are expected to come from those cuts. However, a University of Missouri economic policy analyst says that these discussions rarely include a focus on the consequences of reduced revenue for state programs and services, many of which, research shows, are important to economic growth and factors in business decisions.

In a new paper, Judith Stallmann, a professor in the MU Truman School of Public Affairs and College of Agriculture, Food and Natural Resources, summarized research on tax cuts and the resulting expenditure cuts and their effects on state economies throughout the country. She says the research shows that in general, positive economic gains attributed to tax cuts are often offset by greater negative impacts due to cuts in expenditures and subsequent reduced public services.

“Focusing just on the impact of taxes on economic growth ignores half of the issue,” Stallmann said. “Taxes fund public services and infrastructure which influence economic growth because they affect the profitability of businesses. Research shows positive impacts of tax cuts on economic growth are often outweighed by negative impacts of expenditure cuts on economic growth. That is, the net impact is negative. It is crucial, therefore, for policy makers to examine the economic tradeoffs that exist between cutting public expenditures and cutting taxes.”

As an example, Stallmann points to Missouri, which is a low-tax state relative to most states in the country. She says that an income tax cut in Missouri would likely not lead to economic growth in the state because the required cuts to public services would offset any potential gains. Stallman says that since Missouri already is a low-tax state, if low taxes cause economic growth, it should be enjoying economic benefits and growth relative to other, higher taxed states. A trend, she says, that is not occurring.

Stallmann also says in cases where state expenditures are beyond what is efficient, tax cuts can produce overall economic gains.

“It is important to note that the positive relationship between public expenditures and economic growth does not hold for all expenditures,” Stallmann says. “This trend may only hold up to a certain threshold; that is, public spending may stimulate economic growth, but only to a certain point and eventually the costs associated with public spending may begin to outweigh their benefits. Furthermore, the same level of expenditures can have different impacts depending on how efficiently they are used. Being a low-tax state , it is unlikely that Missouri is beyond these thresholds.”

To read Stallmann’s full report visit: http://ipp.missouri.edu/files/ipp/attachments/09-2013_public_expenditures_and_economic_growth_.pdf