Sauerbrey tax plan: dueling predictions CAMPAIGN 1994--THE RACE FOR GOVERNOR

October 21, 1994|By Frank D. Roylance | Frank D. Roylance,Sun Staff Writer

There are a great many Maryland voters who like Ellen Sauerbrey's promise to cut personal income taxes by 24 percent.

Some believe she could do it, and it would fatten their paychecks. Others figure she'd get some of what she wants, and at least slow down the growth of state government.

But would the tax cuts have the impact the Republican gubernatorial candidate wants? Would they stimulate the economy and make Maryland more attractive to development?

While some economists and the Maryland Chamber of Commerce answer with an emphatic yes, other analysts interviewed by The Sun warn that proposals like Mrs. Sauerbrey's could have the opposite effect.

They note that no other state in recent years has completed tax cuts of that magnitude. States that have tried more modest cuts, moreover, have not been able to avoid reduced services or financial gimmickry.

They say such cuts inevitably put pressure on local governments to reduce services or raise taxes.

Slimmer government may be what voters want but, these analysts predict, reduced services or higher property taxes could make it harder -- not easier -- to attract new business activity and jobs.

In defense of its proposal, the Sauerbrey campaign has pointed to a paper by the conservative Cato Institute in Washington, which urged a 25 percent income tax cut and a one-year spending freeze as part of its "Prescription for Economic Revival in Maryland."

"State income taxes are highly destructive to new business and job creation," the study says. "Maryland can attract new enterprises and employment opportunities by reducing its income tax rates."

The Cato report cites "dramatic" economic resurgence in

Massachusetts and Michigan after tax and budget cuts. But other analysts say that there is no conclusive evidence from Massachusetts, Michigan or elsewhere that the cuts produce growth.

"No one can say that these cuts lead to growth in the economy," said Dr. Henry Raimondo, professor of public policy at Rutgers University's Eagleton Institute of Politics. "Some would argue they have no effect -- a tax giveaway with no tangible growth realized."

How ugly is Maryland's tax "profile?" It depends on how you look at it. The Cato Institute calls Maryland's tax burden "crushing." State personal income taxes paid per person totaled $592 in 1992, placing Maryland 7th in the nation.

Marylanders earn more than most Americans, however, and when figured per $1,000 of earnings, Maryland's income tax burden ranks 14th.

Other Maryland taxes, particularly corporate taxes, are actually below national averages. And when all taxes paid per capita in Maryland are considered, Maryland ranked 19th in 1992. That's lower than Pennsylvania and just $37 a year -- less than 3 percent -- more than the national average.

The Maryland Chamber of Commerce, however, believes Maryland's tax profile sticks out unattractively when compared with other states. In fact, Maryland's real estate recordation and transfer taxes are the nation's second-highest.

Not everyone agrees that state income tax comparisons are very important to businesses looking for a place to locate or expand.

Syracuse University economist Michael Wasylenko said, "Wage rates, unionization, the productivity of the labor force, how it is educated, and land prices are going to drive [decisions] more than tax issues, especially personal tax issues."

"I don't think Maryland's income taxes are particularly high, and I don't think a cut will do very much for you," he said.

Dr. Wasylenko argued in the National Tax Journal this year that differences in taxes and spending among the states have played a declining role in economic development since 1983 as markets have grown more global.

Analysts say there are no models in other states for cuts of the magnitude Mrs. Sauerbrey is proposing.

Although Delaware enacted large tax cuts beginning in 1979, analyzing the growth that followed is complicated by 1982 state banking deregulation that attracted out-of-state bank operations and sparked a building boom.

There may eventually be a model in New Jersey, where Gov. Christine Todd Whitman has cut income taxes 5 percent this year and another 10 percent beginning Jan. 1. Mrs. Whitman credits her cuts for spurring New Jersey's current growth. But others say it's too soon for that to be true, noting this year's installment will save a family earning $50,000 just $51 this year.

Governor Whitman points to Massachusetts and Michigan as her models, but their cases are not closely comparable. GOP Gov. William Weld in Massachusetts inherited a 4.8 percent income tax cut passed under his predecessor; he has won spending cuts and smaller tax cuts of his own. Michigan's Gov. John Engler has focused on spending restraint to avoid tax increases.

Do cuts lead to growth?

Have their efforts spurred their states' economies? The Cato Institute says yes. Others say that's not so clear.

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