In seeking solutions to Illinois’ fiscal crises some have suggested that the secret to general prosperity is allowing wealthy folks to keep more of their money. It is claimed that this approach would result in new jobs and increased funding for schools and local government services. This could be accomplished through generous tax cuts for businesses and the wealthy. 

In 2012 this theory was given a real live test. Kansas Governor Brownback and the state legislature passed legislation loaded with large tax cuts for everyone. The short-term result was that tax receipts plunged, unemployment and budget deficits went up, and support for needy families and the state’s bond rating went down. 

Nevertheless the governor asked for patience, insisting that prosperity was just around the corner. But the program continued into his second term, despite the fact that, by then, Kansas had fallen from 12th to 41st in personal-income growth. Schools were planning to close early, pension funds were being shorted, Medicaid was cut, as was support for state universities. 

The Kansas Capital Journal concluded that Governor Brownback’s “vision for fiscal policy has been devastating.” Other newspapers opined that it could be a generation before the state fully recovered from the governor’s tax experiment. Meanwhile, the governor has vetoed all tax legislation intended to raise more than $1B to plug the budget shortfall. 

Scholars have studied reasons for the failure of low taxes to stimulate economic growth. One such scholar — Michael Mazerov, senior fellow at the Center on Budget Policy Priorities in Washington D.C. — has come up with some surprising insights:

a.   There is little correlation between low corporate and individual taxes and economic growth. Therefore, reducing public services in an attempt to stimulate economic growth is not cost-effective.

b.   The core drivers of economic growth are investment in human capital (education), physical infrastructure (public transportation, roads, bridges), and innovation.

c.    A survey of entrepreneurs shows that the most important factors to them is choosing a site that has, first and foremost, access to a pool of knowledgeable and talented employees, and secondly, proximity to customers and suppliers; low taxes are way down the list.

d.    It is start-up companies that are primarily responsible for job creation. Therefore, a state must encourage start-ups. Ninety percent of entrepreneurs who founded start-ups stayed in the state. The reasons had to do with family, availability of customers and suppliers, and the presence of a skilled workforce.

e.    Entrepreneurs cannot be lured with corporate tax cuts. Most start-ups begin as small businesses, i.e. “S corporations.” S corporations do not pay state corporate income taxes because their profits are passed directly to their owners who pay instead a personal state income tax. 

These are just a few insights that may be useful to Illinois’ economic planners. The question is, will they heed them.

Al Popowits is a resident of River Forest.

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