Cutting taxes is bad for business, says Md. expert's study

Little job growth stems from tax breaks, he says

He got it `backwards,' says critic

March 23, 2004|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

States and counties cutting taxes to boost job growth are likely undermining their own efforts, an economist argues in a new book - the latest salvo in a battle over the impact of taxes on economic development.

Robert G. Lynch, author of the study and chairman of the economics department at Washington College in Chestertown, said he found little proof that tax breaks and incentives create jobs or encourage businesses to move from one state to another.

The study was released today by the Economic Policy Institute in Washington, which focuses on the interests of low- and middle-income workers. Rethinking Growth Strategies argues that lowering taxes can actually act as a deterrent to economic development if roads and other public services that matter to businesses suffer.

"Starving the infrastructure is not an effective way to promote long-term growth," Lynch said yesterday. "On balance you're better off raising taxes than cutting public spending."

But some business groups, economists and conservatives greet Lynch's ideas with skepticism. They believe that higher tax rates scare off businesses and lower rates stimulate growth.

"I think he's backwards," said state Sen. Robert H. Kittleman, a Republican who represents Howard and Carroll counties. "Tax cuts generally help business. No one rule fits all, but you want to be competitive - if you have a better business climate than other states, you're going to get more businesses."

If Lynch is right, "socialism would work beautifully - and it doesn't," Kittleman said.

The arguments might be academic, but the result is not. States are forever trying to beat their neighbors on taxes to win jobs, not to mention handing out billions in incentives each year to lure or keep companies.

Lynch insists that high-quality services, not lower taxes, encourage economic development. Labor costs alone far exceed state and local tax expenses for businesses, he said, so good schools - and decent transportation networks, public safety and similar services - help companies keep expenses down.

He offers Minnesota as an example. The state has a higher business tax burden than its neighbor South Dakota - and a higher per capita income after taxes, higher average yearly pay growth and higher employment growth. Its residents are more highly educated, its roads and bridges are better maintained and its business failure rate is lower, Lynch said.

Bill Schweke, research director for the Corporation for Enterprise Development, thinks tax differences between cities and suburbs in the same metro area play a larger role, but he agrees with Lynch's essential points. "Tax competitiveness ... shouldn't trump everything," Schweke said. "Ultimately your foundations have to be sound."

Maryland's tax rank is debated just as hotly as the effect of those taxes. Businesses' share of total state and local taxes is smaller in Maryland than any other state, according to a study by Ernst & Young LLP for the Council on State Taxation in January. It's just under a third of the pie.

But a later study by Ernst & Young, commissioned by the Maryland Chamber of Commerce, said the first report didn't include some taxes - including the $1 billion in individual income tax paid by partnerships, limited liability corporations and other businesses not listed as corporations.

"Taxes are a significant factor," said William Burns, a chamber spokesman. "Not the only factor, but it's one that the state clearly has control over, and it's a factor that impacts the businesses' bottom line."

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