Christensen: Tax cuts, jobs and the truth

Staff WriterJune 5, 2011 

In the battle for public opinion over North Carolina's budget, there have been rallies, news conferences, letter-writing campaigns and heavy-duty lobbying.

The more subtle weapons are reports and studies by think tanks and academic institutions in Boston, California and Chapel Hill that are being used to buttress public policy or political positions.

It is well understood that state workers and teachers are facing layoffs as the legislature tries to close a $2.5 billion shortfall.

The Republican-controlled legislature, which is cutting taxes at the same time it is cutting government, argues that its plans will create private-sector jobs.

During the budget debate last week, Republicans said the tax cuts would result in the creation of 17,000 private-sector jobs.

That is based on an economic impact study conducted in April at the legislature's request by the University of North Carolina's Center for Competitive Economies.

The UNC study analyzed the GOP plan to let expire "temporary" tax increases - a 1 cent sales tax and a personal and corporate income tax surcharge. (The corporate tax cuts were not part of the final package.)

The tax cuts totaled $1.6 billion for the fiscal year beginning July 1, and $2 billion for the following fiscal year. UNC estimated that the tax cuts would result in the creation, directly or indirectly over the next two years, of 19,439 private-sector jobs.

That estimate was criticized by the N.C. Budget and Tax Center, a liberal public policy group opposed to the tax cuts, which questioned the type of analysis used by UNC and said the job multipliers used in the study "grossly overstates" the impact of the tax cuts on job growth.

Edwin McLenaghan, an analyst with the N.C. Budget and Tax Center, said UNC did not use the same measuring sticks that national organizations such as the Congressional Budget Office and Moody's use.

G. Jason Jolley, a UNC economist who headed the study, defended the methodology and said the national studies were measuring different sorts of tax cuts. In national cases, they were often one-time cuts such as the Bush tax cuts, whereas the North Carolina cuts were restoring temporary taxes to historical levels, and therefore would be treated differently by taxpayers.

To shed further light on the question, I ran this by Mike Walden, an economist at N.C. State University.

Walden said the multipliers used by the UNC study to predict jobs created seemed reasonable to him.

"What is left unsaid - and which may be beyond the task of the UNC study - is that there would also be 'multiplier' effects if the taxes are kept and the funds are spent by the state," said Walden, who is author of "North Carolina in the Connected Age."

In other words, the study looked at the impact on jobs of cutting taxes, but not the impact on jobs of not cutting taxes.

There was a similar question when the John Locke Foundation, a conservative Raleigh think tank, hired The Beacon Hill Institute at Suffolk University, a Boston conservative think tank, to do an economic analysis of the impact of the tax cuts. It predicted the tax cuts would result in the creation of 17,016 private-sector jobs.

But like the UNC study, the Beacon Hill study asked only half the question. It did not ask how many jobs would be created - or kept - if the tax cuts were not made.

Democratic Gov. Bev Perdue has been touting a study of her own to criticize the Republican budget.

In a letter to the GOP legislative leadership, Perdue said the budget bill would result in $2 billion in cuts to Medicaid, the federal-state funded insurance program for the poor and the disabled; $750 million in state cuts and the rest in the loss of matching federal funds.

She wrote "an estimated 40,000 private sector jobs will be lost due to the $2 billion in cuts to Medicaid, putting medical providers and companies at risk of going out of business."

Republican Senate leader Phil Berger was skeptical. "I don't see those numbers as having any basis in reality."

The governor's office cites a January 2009 study by the Kaiser Commission, a California foundation that focuses on health care, "The Role of Medicaid in State Economies" that looks at 23 states including North Carolina. The study examined how a decrease in the flow of dollars to hospitals, nursing homes, health agencies and pharmacies, and a reduction in the amount of money circulating through the economy affected employment, income, state tax revenue and economic output.

The Kaiser Commission did not do a separate study on North Carolina but relied on an April 2002 study by the Institute for Public Health at UNC-Chapel Hill. It concluded that cutting $400 million in Medicaid funds would result in the loss of 9,500 private sector jobs. By that measure, the loss of $2 billion in Medicaid funds would result in the loss of 47,500 private jobs.

Walden said debates about how much to spend for schools, or how much to cut taxes are complex and cannot be readily measured by an economic impact study.

"Such economic impact studies may detract from - what may be the most important issue - what is the role of government and how much should it spend in that role," Walden said. "This is the real debate." or 919-829-4532

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