Not All Tax Cuts Are Created Equal
Photo by K Whiteford
As leaders in Annapolis grapple with how best to support Maryland’s continued economic progress, both the governor and legislative leaders have said they want to lower taxes. The decisions they make could greatly affect the state’s future prosperity. So it’s important during these deliberations to understand that not all tax cuts are created equal.
Tax breaks such as the Earned Income Tax Credit, which help working people who are struggling to make ends meet, are proven to help the economy because people with very low incomes are much more likely to spend the extra money from a tax refund on things they need but couldn’t otherwise afford, like car repairs.
On the other hand, an income tax cut benefitting the wealthiest residents, which in Maryland includes a higher than average share of millionaires, doesn’t have the same effect. People with very high incomes can already afford to purchase the things they need and want, so a few hundred extra dollars in their pockets is unlikely to make them spend more at local businesses.
The same goes for tax breaks for corporations. Corporate taxes are a very small part of the overall cost of doing business, and company managers decide to expand a business or hire more employees only when there is sufficient demand for their products to support doing so. Any tax savings are more likely to be passed back to corporate shareholders – mostly outside of Maryland — than invested in the local economy.
Tax giveaways to corporations and the wealthy can also make things worse for average Marylanders and harm the state’s economy. The state has to pay for those tax breaks by raising other taxes or reducing public investment in schools, transportation and other building blocks of prosperity.
Advocates for lower taxes on the rich and corporations are wrong when they say the lost revenue will come back to the state due to increased economic activity. The experience of other states is proof. North Carolina’s 2015 tax cuts will soon cost that state over $1 billion per year and have already constrained the state’s ability to make the public investments that promote widespread prosperity and a healthy economy. For example, North Carolina is paying for more than 1,700 fewer teachers through state funds than in 2009, even though there are more children attending public schools, which means local governments have to increase class sizes or invest more local tax dollars in their schools.
And a recent analysis from Kansas shows the state, which was 12th nationally in personal income growth before its tax cuts, is now 41st. That’s just the latest example of the harm to the state’s economy that has occurred since decision-makers there gave major tax breaks to business owners and other wealthy individuals.
There is no reason for Maryland to head down this self-destructive path. The state’s economy continues to improve, if not quite as fast as policymakers would like. For example, Maryland’s unemployment rate just dipped below 5 percent for the first time in more than seven years and our gross state product is above the national average. Squandering public dollars on costly giveaways comes with high costs to Maryland’s current public investments and services, as well as the state’s future economic health.
A more productive discussion to have in Annapolis than focusing on tax cuts would focus on strategies that will promote wide prosperity and boost the economy, like strengthening the state Earned Income Tax credit, supporting fast-growing local businesses, and investing in infrastructure.
