Some are lamenting Arizona’s recent tax cuts and others are cheering. Both sides, however, are missing a larger point. Much of the discussion has focused on a big number: $2.5 billion. That’s the estimated size of these tax cuts over the next eight years.
Fixation on the overall size of the tax cut is not the whole story. The form of the tax cut matters, too, and perhaps more so. No matter what side you’re on, the truth is, a good portion of these tax cuts aren’t likely to produce new economic growth.
Imagine that a tax cut consisted entirely of tax credits to people who have red hair. That would create all kinds of adverse incentives. Hair dye is pretty cheap, and if the price were right, we all might become redheads to get the tax benefit. (Your tax auditor may not know the difference even if your stylist does.)
It’s not likely that such a tax credit would actually do much more than move resources around – paying for hair dye instead of a dinner at a restaurant, for instance. It won’t really create new economic activity.
As it stands now, at least 16 percent of the revenue estimate of the tax cuts signed into law fit into the category of the state trying to favor certain types of activity over others. For example, one specific tax credit to businesses that make a certain level of investment and create a certain number of jobs was expanded in this year’s tax legislation. As Robert Robb explained in the Arizona Republic recently, this is not likely to create new jobs; instead, it will likely subsidize job creation today that would have materialized sometime in the future anyway. We’ve seen this sort of thing before. A federal per job tax credit was enacted in 1977 and economists estimate that at least two-thirds of the supposedly “new” jobs that emerged would have appeared anyway.
If the goal of a tax cut is to spur new and long-term economic growth, tax cuts that lower rates for all businesses and individuals at the same time are better than those that require a business to take specific actions dictated by government.
Goldwater Institute: Don’t Repeat Jimmy Carter’s Failed Policies in Special Session Jobs Bill
Arizona Republic: "Refundable Tax Credit Way Over the Top"
Arizona Capitol Times: "GOP Touts $2.5 Billion in Tax Cuts, but Critics Say Arizona Can’t Afford Them"