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Flawed Economic Model Hurts Washington State

Posted by Andy Nicholas at Jun 09, 2014 07:30 AM |

An economic model frequently cited by some Washington state lawmakers to justify their opposition to tax increases distorts the impact of tax proposals on state economies, according to a new study from the non-partisan Institute on Taxation and Economic Policy (ITEP).

The report makes it clear the Beacon Hill Institute’s State Tax Analysis Modeling Program (STAMP), is rigged to exaggerate the benefits of tax cuts for large corporations and wealthy households and to minimize the benefits of state spending on universities and community colleges, infrastructure, public safety, and other investments that help build a strong state economy.

In Washington state, lawmakers have a mandate from the State Supreme Court to generate at least $4.5 billion in new tax resources per two-year budget cycle to improve basic education. To comply with the Court’s ruling, Governor Inslee and leaders in the House have put forward sensible proposals to close a number of wasteful tax breaks and extend a temporary business tax increase.

However, these proposals were thwarted by policymakers who would rather use the Court’s mandate as an excuse to eliminate other investments that ensure kids’ well-being and help them learn, such as health care and child care. The same policymakers cited STAMP-based projections that the proposed tax measures would do implausibly large damage to the state economy.

ITEP’s study conclusively shows that STAMP projections, and the “junk economics” behind them, are being used to short-change future generations of Washingtonians and should be abandoned.  

According to the study, STAMP’s fundamental flaws include:

  • An unrealistic economic foundation: The model state economies that STAMP uses to measure whether a particular policy is good or bad for employers, families, and workers bear little resemblance to reality. The model dubiously assumes that state economies are perfectly competitive at all times, meaning they never go through recessions, everyone who wants a job always has one, and corporations and consumers have equal amounts of knowledge about the safety and quality of all products on the market.
  • Public investments are undervalued: Governments play a crucial role in state economies, employing workers and purchasing goods and services from businesses, which pumps significant amounts of money into the marketplace. States also maintain investments like education, healthcare, roads and other infrastructure that are vital to long-term economic growth. However, STAMP mischaracterizes government, treating it as an institution that merely redistributes tax dollars from one group to another. This enormous oversimplification greatly diminishes the economic value of state government in STAMP projections.
  • Impact of taxes is overstated: By contrast, STAMP assumes even small tax changes are exceptionally bad for state economies. Workers, businesses, and consumers are assumed to be hypersensitive to state taxes, fleeing en masse at the first hint of a tax increase. As ITEP points out, a sizable amount of research shows individuals and businesses to be much less sensitive to taxes than STAMP suggests.
  • Results that are out of line with history and mainstream economics: Not surprisingly, STAMP’s results frequently contradict predictions made be mainstream economists and models that use sensible assumptions. In Kansas, STAMP recently predicted a sizable income tax cut would create up to 42,000 new jobs in the state. However, since the cut was enacted in 2012, Kansas has trailed the nation in jobs, incomes, and the growth of registered businesses.

For more information read the entire report.

 

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