INDEPENDENCE ISSUE I Naot Issue Paper #16-92 October, 1992 HEAVY JOB LOSSES FORESEEN IF TAX HIKE PASSES I (303) 279-6536 FAX (303) 279-4176 ES INDEPENDENCE INSTITUTE 14142 DENVER WEST PARKWAY, SUITE 185 == GOLDEN, COLORADO 80401 Note: The Independence Issue Papers are published for educational purposes only, and the authors speak for themselves, Nothing written here is to be construed as necessarily representing the views of the Independence Institute, or as an attempt to influence any election or legislative action,16-92 October 1, 1992 HEAVY JOB LOSSES FORESEEN IF TAX HIKE PASSES Amendment 6, Gov. Roy Romer's school tax increase proposal, could cost Colorado 57,000 jobs if Romer's own economic and political assumptions are correct. A. leading economic researcher says the loss could reach 75,000 jobs. No one foresees an economic boost from the tax. ‘Taxpayers have already been found to come last under the Children First amendment -- because hidden triggers in its 33% sales tax increase would also raise property taxes and income taxes for a combined revenue hit of almost $700 million, Now its disastrous impact on the state's economy can be seen in light of the widely recognized linkage between tax burdens and job creation. A recent debate over that linkage occurred when Gov. Romer proposed a huge incentive package to lure the United Airlines maintenance base to Denver in 1991. The public was told then that $600 million in tax credits for United could create as many as 49,000 jobs in Colorado. Arithmetically, this reflects an assumption that one new job will result for every $12,250 not taxed out of the private sector. Since Romer's economic escalator must obviously move downward at the same rate he expected it to move upward, the job-loss impact of Amendment 6 can be calculated by dividing $12,250 into the amendment’s total anticipated revenue. To peg the amount of that revenue, we can again play out the scenario predicted by Romer himself. First, no one disputes that the additional one-cent state sales tax would about $333 million annually. Second, no one disputes that the 55-45 matching formula in the school finance act would then force local property taxes to go up unless the legislature revises the act next year, and since Romer assumes legislative paralysis in respect to his much-feared 12% cut in siate aid to schools, it is only fair to assume a similar hands-off attitude on revising the 55-45 match. This means $172 million hike in property taxes. (See detailed analysis in Independence Issue Paper No. 14-92, Amendment 6 Puts Taxpayers Last.) ‘Third, since a key provision of the amendment locks down state school aid at @ fixed amount and forbids the application of sales tax revenues in reaching that amount, the legislature would be forced to seek other revenue sources to meet the lockdown, probably by raising the income tax. Independence Institute researcher Larry Sarner puts that figure at $192 million. (Ibid.) Opponents of Amendment 6, ironically, argue that state revenue as of July 1993 will be nearly $200 million in surplus, removing the need for Romer's proposal in the first place -- but as the Governor insists that any such surplus will be much smaller and of a non-recurring nature, he will have to live with his own logic and admit the possibility of further new taxes to fuifill the lockdown provision. ‘The overall job-loss impact of Children First can then be calculated as follows: Revenue source Dollars of new tax _| Assuming Jobs Lost Sales tax increase __| $333 million $12,250 per job 27,000 Property tax increase | $172 million 55-45 match kept__| 14,000 Income tax increase_| $192 million Minimal 7/93 surplus | 16,000 TOTALS $697 million Romer scenario true_| 57,000 Continued, over...JOB LOSSES FORESEEN - Continued conor Warns That Ten-Year Impact Could Reach 75,000 Jobs Gov. Romer would be to some extent saved from himself, and the state from his fiscal folly, if the $12,250 multiplier assumed in the United deal proved to be low. A higher multiplier, on the other hand, would mean Amendment 6 hurts the Colorado economy even worse. From the economists’ standpoint, how sound is the $12,250 assumption? In general terms, there is no doubt that job creation and taxes are closely linked. "Taxes have a devastating effect on economic growth.” according to an American Legislative Exchange Council study by Ohio University economist Richard Vedder. "This is especially true for states because consumers and businesses can 0 easily move their economic activity 10 lower tax states.” Vedder found that in the 1980s the ten states that raised their taxes the most in relation to personal income grew less than half as fast as the ten states that lowered their tax burdens the most. (Saving the States: A Blueprint for Budget Reform, ALEC Briefing Book, May 1992.) Specifically applying his findings to Colorado, Vedder writes: "If the state were to ‘enact new taxes in the coming year totalling $700 million, the ten-year impact will eventually ‘cost the state up to 75,000 jobs and a loss of over $3 billion annually in personal income t0 Coloradans.” He adds that this number does not include the further job losses likely from slower population growth associated with higher taxes. (Research memo t0 Independence Institute 10/1/92.) Some forecasters come in significantly lower. Robert Genetski of Chicago Economics found in studying the Ilinois economy that the job-loss multiplier per dollar of sales tax was about $40,000, This is more cautious than Vedder's estimates or the United claims of last year. It would mean that “only” 8,325 jobs would disappear in Colorado as a result of the Romer sales tax increase. Applying the Genetski multiplier to the entire $697 million triple tax hike -- safe to do, since property and income taxes hurt the economy more than sales taxes -- lowers the overall job-loss prediction from Children First to 17,425. Conclusion: How Many Communities Will Be Erased? Is anyone prepared to argue that working people and employers in our state's still- fragile economic recovery will benefit from taking one-third to two-thirds of a billion dollars ‘out of general circulation and putting them into school budgets? Not even the most enthusiastic proponents of Amendment 6 can be heard making that case. So job losses by the thousands are a given if the amendment passes. The only point of contention is how many thousands. To get a sense of scale, if we consider that every employed person supports an average of one or two dependents, then the abstract job-loss numbers can be represented as the disappearance of the livelihood for an entire Colorado community. The low, low-end estimate of 8,325 jobs lost (Genetski, sales tax only) would then be comparable to the disappearance of commimities the size of Eagle County or Broomfield. ‘The mid-range estimate of 57,000 jobs lost (Romer scenario, see table) would be comparable to erasing Pueblo County or Lakewood from our state’s ‘economic map. The high-end estimate of 75,000 jobs lost (Vedder memo) would equate to cancelling paychecks for everyone in Boulder County or Aurora, Voters can take their pick... or pick none of the above. -() Independence Institute, 1992 Independence Institute is a nonprofit, nonpartisan _John Andrews, president of the Institute and editor think tank specializing in Colorado issues. of the Independence Issue paper series, oversaw Reprint rights are granted for thie paper, provided the preparation of this policy brief proper credit is given