Tax cuts are a zero-sum game

A new report challenges the conventional wisdom that states can stimulate their local economies by cutting taxes. “The Zero-Sum Game,” from the Center on Budget and Policy Priorities in Washington, D.C., explains that the effects of broad tax cuts are generally cancelled out by the reduction in state spending and layoffs of public employees that typically result from tax cuts. The report also challenges the effectiveness of tax credits that are supposed to encourage businesses to create new jobs.

The authors of “The Zero-Sum Game” are Iris Lav, senior advisor for the Center and an expert on state budget and tax policies, and Robert Tannenwald, a senior fellow at the Center and the former director of the Federal Reserve Bank of Boston’s New England Public Policy Center.

Tax cuts and tax credits both figure into Gov. Jim Douglas’s fiscal and economic development strategies. He proposed cuts to the state capital gains and estate taxes, which he estimated would reduce state revenues by $10 million. Meanwhile, a recent analysis by the Legislature’s economist concluded that the governor’s proposed cuts to the human services budget could result in the loss of 1,000 to 1,400 jobs.

Vermont already provides tax credits to businesses through the Vermont Employment Growth Incentive (VEGI) program. At the governor’s urging, the Vermont Emergency Board, a committee comprising the governor and four legislators, recently agreed to increase the amount of tax credits the state can award annually.

“The Zero-Sum Game” is available from the Center on Budget and Policy Priorities.