Proposition 103 supports education while protecting economic growth
On Nov. 1, Coloradans will vote on Proposition 103, aballot initiative that would raise approximately $2.9billion over five years to fund K-12 and highereducation. The revenue would be generated by raisingthe income tax rate from 4.63% to 5%, and raising thestate sales tax rate from 2.9% to 3%. These are the ratesthat existed in 1999, and both increases would betemporary, ending after five years.
Advocates of the initiative argue it will helpcounteract deep cuts to the state’s education spendingenacted over the past three years and help forestallfuture cuts. Proposition 103’s sponsor, state Sen. RollieHeath, argues that the initiative has “huge potential tohelp schools.”
Colorado’s budget for fiscal year 2011-12cuts education spending by $227.5 million over the fiscalyear 2010-2011 budget, for an average reduction of $344per student.
According to the Colorado School FinanceProject, Colorado spent $2,408 less per pupil inkindergarten through 12th grade than the nationalaverage of $10,586 in 2009-10, the most recent year forwhich data are available.
Proposition 103 will help keepColorado from falling further behind.
Heath also arguesthat the initiative is needed to maintain an educatedworkforce that will help Colorado stay economicallycompetitive with other states.Opponents of Proposition 103 call it a “jobs killer”and argue the initiative would deal a “crushing blow” toColorado’s struggling economy as it recovers from therecession. In support of this claim, they cite a studycarried out by Eric Fruits, an Oregon-based economicconsultant, for the Common Sense Policy Roundtable, aColorado-based research organization.
Fruits’ studyuses an econometric model to predict slower job growthin Colorado relative to a baseline forecast for the nextfive years if voters approve Proposition 103. He usesdata from the Legislative Council staff to project thatColorado will add 320,000 jobs from 2012 to 2017without Proposition 103. If Proposition 103 passes, hismodel predicts the Colorado economy will add 289,000 jobs, or 30,500 fewer jobs than his baseline forecast.In addition, Barry Poulson, senior fellow in fiscalpolicy at the Independence Institute, and John D.Merrifield, professor of economics at the University of Texas, authored a study using a model developed byPoulson to estimate the effects of Proposition 103 oneconomic growth and jobs in Colorado. They estimatethat if Proposition 103 passes, Colorado’s economy willcreate 7,400 to 11,600 fewer jobs than it otherwisewould over the period 2012 through 2016.
This paper reviews the analysis contained in theopponents’ two papers, summarizes some of theacademic literature relating to taxes and economicgrowth and presents data on the effects of tax increasesrecently enacted by other states. Finally, it describes theeffect that Proposition 103 will have on economic growthand jobs in Colorado.
Fruits and Poulson studies
Both Fruits and Poulson cite a number of academicstudies that examine the relationship between state andlocal tax rates and economic growth and employmentlevels. Fruits goes into much greater detail in reviewingthe results of this literature and concludes that it showstwo things:1) Higher marginal tax rates are associated withreduced employment growth.2) Higher marginal tax rates will have a negativeeffect on net in-migration trends, meaning fewer peoplewill move to Colorado.Poulson essentially concurs with these findings,stating that taxpayers tend to migrate to states withlower taxes and that businesses respond to higher taxesby investing and relocating in states with lower taxes.Both rely on these findings in constructing themodels they use to estimate the effects of Proposition103 on economic growth and jobs. Neither paperprovides sufficient detail to determine exactly how theirmodels work, the factors used in the models or therelationships between the different factors that wereused to generate their findings. Therefore, we cannotreplicate their analysis, thoroughly examine the relativeimportance of different factors or check to see if spending on public services is accounted for in theiranalyses. However, other academic studies that examinehow taxes and spending on public services such aseducation affect economic development lead us toconclude that their findings are exaggerated at best, if not completely off base.
Research on the effects of taxes,government spending on economic growth
Most of the academic studies of business locationdecisions find that state and local taxes are not theprimary factor in deciding where businesses locate.Rather, factors such as the cost and quality of labor,quality of public services, proximity to markets andaccess to suppliers are more important. Because theeffect of taxes on business location decisions is small,costs such as wages and other compensation canpotentially overshadow the differences in taxes betweenstates and localities.
Taxes play a role, however, and research on theeffects of state taxes on economic growth tends to focus