Off the Charts Blog | Center on Budget and Policy Priorities

This week on Off the Charts, we talked about the elections, jobs, and taxes.

• On the elections, Jon Shure pointed to several ballot initiatives that may significantly affect states’ ability to provide public services, and Nicholas Johnson underscored the need for newly elected governors to take a balanced approach to closing state budget holes.
• On jobs, Chad Stone emphasized the need to extend federal emergency unemployment benefits. Chad also discussed the most recent employment report, noting that the economy is still weak and needs an extra boost.
• On taxes, Chuck Marr explained why it makes no sense to extend the upper-income tax cuts. Chuck also outlined the reasoning behind a tax provision of health reform (i.e., the Affordable Care Act), and Michael Mazerov explained why corporate tax cuts aren’t an effective means of economic stimulus.

In other news, the Center released a podcast, featuring Jon Shure, on state ballot initiatives (on iTunes here), and a statement on the October employment report.

Today’s employment report contains much better news on job creation than was expected, but it does not change the underlying fact that the economic recovery remains weak and the economy needs a boost. Below are some charts to show how the new figures look in historical context; see our statement with analysis.

See our chart book for more charts.

When Congress returns to work in two weeks, it faces an important decision:  whether to let federal emergency unemployment insurance (UI) benefits, which are helping 5 million jobless workers and their families, expire even though unemployment is near 10 percent and expected to stay above 9 percent through 2011.

The emergency measures, which provide additional weeks of federal benefits to unemployed workers who exhaust their 26 weeks of regular, state-funded UI benefits before they can find a job, are scheduled to expire November 30.  If Congress lets these measures expire, it will be 26-weeks-and-out for unemployed workers in most states and benefits will be sharply curtailed in the rest (see map).  (Some states will continue to provide up to 20 additional weeks of benefits, but they will have to pay half of the cost.)

Congress has provided emergency UI benefits in every major recession since the 1950s and has kept that emergency program in place until the economy was back on track and job prospects were improving.  In all previous cases, the unemployment rate was 7.2 percent or lower when the program expired.  It’s 9.6 percent now and showing no signs of coming down quickly.

Finding a job remains extremely difficult:  about 15 million people are competing for about 3 million job openings.  That means that even if every job opening were instantly filled with an unemployed worker, four out of five unemployed workers would still be looking for a job.  This situation is far worse than in the recovery from the 2001 recession, as the chart below shows.

As the November 30 deadline approaches, we will be reminding policymakers and others of the critical importance of continuing emergency UI benefits through next year.  That wouldn’t just help millions of jobless workers cope with a dismal job market; it would also help keep the economic recovery moving along by averting a severe blow to these families’ spending.

Read all posts in this series:

• #1: What’s the Issue Before Congress?
• #2: Do We Still Need a Federal Unemployment Insurance Program?
• #3: Who Could Lose Federal Benefits Next Month?
• #4: Who Gets Unemployment Insurance?
• #5: How Does Unemployment Insurance Affect the Economy?

As newly elected governors confront their states’ grim fiscal reality, one promise that some of them made during the campaign should go in the trash along with the yard signs and the balloons from last night’s victory celebrations:  cutting or eliminating their state’s corporate income tax.

At least six of the new governors elected yesterday promised corporate tax cuts as a way to boost the state economy.  Governors-elect Tom Corbett of Pennsylvania, Nathan Deal of Georgia, and Terry Branstad of Iowa proposed sharp, across-the-board cuts in corporate income tax rates of between 30 percent and 50 percent.  Governors-elect Rick Scott of Florida, Nikki Haley of South Carolina, and Scott Walker of Wisconsin promised to eliminate their states’ corporate taxes — over a three-year period in Florida, immediately in South Carolina, and at an unspecified time in Wisconsin.

As a recent Center report explained, cutting state corporate income taxes is not an effective way to stimulate economic growth and in fact is likely to be counterproductive.  Briefly, here’s why:

• The resulting budget cuts or other tax increases would cancel the short-term stimulus. Unlike the federal government, states are required to balance their budgets.  So states must fully offset the revenue loss from corporate tax cuts.  That means some combination of cuts in services and increases in other taxes.  So even if corporations boosted a state’s economy by spending their entire tax cut in-state (which is very unlikely, as noted below), there would be no net stimulus.  The economy would lose as much as it gains.

• Corporate tax cuts could even reduce the total amount of economic activity in the state. Some of corporations’ tax savings would likely go to their out-of-state shareholders in the form of higher dividends, which is good for the shareholders but of no value to the state that cut the taxes.  And some of the savings would go toward paying more federal income tax.  That’s because businesses can deduct their state corporate tax payments when calculating their federal corporate income taxes; a cut in state taxes means less to deduct, so higher federal taxes.  Meanwhile, the state revenue loss from the tax cut would likely mean lower public-sector spending on goods and services, nearly all of which is in-state.

• Corporate tax cuts do little if anything to boost corporate investment over the long run. Numerous studies have found that cutting businesses’ total state and local tax bill by 10 percent would likely boost economic output and jobs by 2 percent to 3 percent.  But, since corporate income taxes account for less than 10 percent of total state and local business taxes in the vast majority of states, eliminating the corporate tax wouldn’t generate 2 percent to 3 percent more long-term growth.  And, even these modest positive effects assume a state wouldn’t cut public services or increase other business taxes to offset the lost revenue.  But that’s exactly what they will do, given states’ balanced-budget requirements.

• Corporate tax cuts weaken long-term growth by causing cuts in public services. Businesses need and demand high-quality education systems to produce skilled workers. They need well-functioning infrastructure to get their employees and supplies to their plants and their products to customers.  They need police and fire protection for their facilities, which need to be located in areas with good schools and recreation to attract senior managers, engineers, and other highly paid personnel.  If states help pay for corporate tax cuts in ways that impair the quality of these services, even the tax cuts’ modest positive potential impacts will not likely materialize.

In short, the evidence overwhelmingly shows that across-the-board corporate tax cuts aren’t an effective means of creating jobs.  Ideally, new governors who have called for these tax cuts will recognize this reality and let these proposals slide down — and then finally off — their priority lists and focus instead on providing needed public services as cost-effectively as possible.  But if they don’t, their legislatures would be well advised not to go along.

Voters in more than half of the states elected new governors yesterday — the first time that’s happened since 1938, according to Stateline.org.  But one thing hasn’t changed:  states still face massive revenue problems resulting from the recession.  Next year will be states’ worst budget year ever.  So what will the new governors do about it?

Many of the new governors promised in their campaigns to “cut spending,” but few specified cuts that would come anywhere near balancing their budgets.  Scott Walker in Wisconsin vowed to cut “policy and pork projects,” but he never indicated which programs he considers pork or whether they come anywhere near adding up to the $3.4 billion needed to balance next year’s budget.  South Dakota’s Dennis Daugaard, facing a 9 percent budget gap, said on his website, “I’m not afraid to make cuts,” but he did not say what those cuts might be.

The lack of specificity may reflect the fact that in most states, budget shortfalls are so large that a cuts-only approach would come at a big price for local school districts, public universities, and providers of health care and human services.  Those areas are where states spend most of their money, so deep spending cuts would hit those hard.

Cutting public services too deeply would also be bad for the economy.  States need good schools, roads, and health care in order to attract and retain businesses.

A number of the incoming governors made promises that, if they keep them, will worsen state finances.  For example, Wisconsin’s Walker, Michigan’s Rick Snyder, South Carolina’s Nikki Haley, and others have promised large corporate tax cuts, despite clear evidence that those tax cuts would deepen state budget problems without boosting the economy.  (My colleague Michael Mazerov will look at this issue later today in a separate post.)  Some other rookie governors have handcuffed themselves with no-new-taxes promises.

A reminder of what governors face:  state tax revenues remain 13 percent below pre-recession levels, and revenue growth in the coming year will be modest at best.  Meanwhile, demographics, inflation, and loss of family income are driving up states’ cost for services.

The result is the largest budget gaps on record, an estimated $140 billion for next fiscal year (which starts July 1 in most states).  States’ balanced-budget rules require them to close those gaps, and they’ll have to do so without emergency federal aid, since the funds Congress has already provided mostly expire this coming June.

Fortunately, a few of the newly elected governors have been explicit about some of the budget-balancing measures they will propose, including tax increases.  In Rhode Island, for example, Lincoln Chafee said he would broaden the sales tax base and might repeal a costly tax break for the wealthy.  Moreover, two sitting governors who raised taxes significantly to help close budget gaps — Deval Patrick in Massachusetts and Martin O’Malley in Maryland — defeated their anti-tax challengers.

Chafee recognizes what O’Malley and Patrick have already demonstrated:  solving states’ recession-driven budget gaps requires a balanced approach that includes revenue measures, not just spending cuts.   Other new governors would do well to acknowledge that reality — regardless of what they said on the campaign trail.