Economists Dispute Logic of Bush’s Stimulus Plan

Slashing and taxing their way to balanced budgets, the nation’s governors say their actions are hurting growth, and that federal fiscal help for state governments would be the most effective form of economic stimulus.

President George W. Bush disagrees.

“[The President’s] conclusion was transferring tax dollars from. . .one government to another government was a tax transfer, it did not have a stimulative effect,” Bush spokesman Ari Fleischer said when asked about the economic effects of fiscal relief.

Bush’s $674 billion economic stimulus plan unveiled Jan. 7 contains no new money for states. The largest component is elimination of the federal tax on dividends, at a cost of more than $300 billion over ten years.

At a time when the nation is struggling to spark its sluggish economy and governors from California to Connecticut are proposing tax increases and spending cuts, Bush’s fiscal strategy looms large. The problem, according to economists and budget analysts interviewed by Stateline.org, is that it makes little economic sense.

“I don’t think that’s true,” said Gary Shoesmith, professor of economics at Wake Forest University, when asked about Fleischer’s claim that fiscal relief is purely a tax transfer and not economic stimulus.

Shoesmith, a self-described fan of Bush’s approach to most economic matters, said as long as the federal government doesn’t raise taxes in order to send money to the states, then the money sent would act as a stimulus.

“What will happen is state governments will spend the money. And state governments will not lay people off. State governments won’t increase taxes, or at least not as much,” he said.

The governors agree, arguing that layoffs, tax increases and spending cuts at the state level act as a drag on the national economy.

“Given that 49 of the 50 states have balanced budget requirements it does not matter whether states reduce spending or increase taxes their actions will be a drag on the economy,” they said in a recent National Governors Association statement.

During the month of January, many state policymakers are repairing old budgets even as they craft new ones for the year ahead. In the majority of states, revenues are not growing fast enough to cover expenses. In just the past week:

Kentucky Gov. Paul Patton (D) proposed increasing taxes on corporations by $350 to $400 million a year. He’s also floating a cigarette tax increase.

Arkansas Gov. Mike Huckabee (R) reiterated his proposal to raise the state sales tax.

Missouri Gov. Bob Holden (D) proposed increasing the state cigarette tax by 55 cents a pack. He also proposed a 5 percent surcharge on the income taxes of Missourians with a taxable income of more than $200,000 a year.

Georgia Gov. Sonny Perdue (R) proposed raising taxes on smokers, beer, wine and liquor drinks and homeowners.

Other governors proposing or considering tax increases include California Gov. Gray Davis (D), Connecticut Gov. John Rowland (R) and Nevada Gov. Kenny Guinn (R).

Collectively, the states must close budget gaps totaling almost $20 billion by June 30. They face an estimated $60 to $80 billion in deficits next year.

All this red ink has governors looking for help from the federal government. They say it would forestall proposed tax increases and spending cuts, thereby acting as a stimulus.

Christopher Carroll, professor of economics at Johns Hopkins University, said the ultimate measure of whether a given policy will stimulate the economy is the effect it has on spending.

“In order to figure out competing claims about what is stimulative and what is not, you have to figure out the effects on spending at the end of the day,” said Carroll, a former member of President Bill Clinton’s Council of Economic Advisers.

“It seems to me a dead certainty that giving money to states would be more of a stimulus than cutting dividend taxes, because people who receive the dividend tax cut tend to be at the very upper part of the income spectrum, and if there’s anybody who doesn’t spend money paycheck to paycheck, it’s the people receiving a dividend tax cut,” he said.

Of course, not everyone is buying the governors’ claim that state fiscal relief would be good for the economy.

Michael Flynn, director of legislation and policy at the American Legislative Exchange Council, a right-leaning state policy organization, said states must cut as deeply as possible before running to Washington, D.C., for help.

“[Fiscal relief] is just a straight transfer of money and doesn’t really address the real problems states have,” he said. “Overspending in the 1990’s has left states with a structural imbalance. Just giving them an infusion of cash is like giving an alcoholic a fifth of Jack Daniels to get to them over to the next AA meeting.”