As the United States struggles to recover from the recession of 2007-2009, loud voices are calling for cuts in state and local taxes to spur economic growth. In particular, advocates argue that cuts in personal income taxes will promote growth and development. But what is the evidence for this idea? Objective scholarly research on the economic effects of state and local expenditures and taxes is often neglected or misrepresented by tax cut proponents.
Evidence from my own studies and those of many others suggests that adjustments in state and local taxes and spending can, at most, spark marginal gains in economic performance. Across the United States in recent decades, states and localities have adopted more similar tax and spending policies, leaving less room for improvement. Crucially, there is no evidence that tax cuts pay for themselves by boosting future growth and tax collections. For public officials, there is no escape from carefully considering how various balances of taxes and spending affect both government budgets and surrounding economies. The truth is that certain kinds of tax reductions may have little effect on economic growth – even as they drain government coffers of revenues needed for crucial economic and social goals.
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