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Deep Budget Cuts Will Add to Unemployment Rolls at Wrong Time
Date:7/9/2009

ially higher-income earners, save a portion of their income, so tax increases remove less than a full dollar of economic activity. As a result, tax increases do not hit the economy dollar-for-dollar like budget cuts do.

"Basic economic principles underlie Governor Ed Rendell's proposal to balance the state's budget in part through an increase in the state's personal income tax," Price said. "The alternative course of significant cuts in state spending would increase the unemployment rolls at exactly the wrong time."

"Pennsylvania's unemployment rate remains about a percentage point lower than the national rate -- an advantage that translates into 60,000 jobs," Price added. "A budget agreement that relies solely on spending cuts would jeopardize that Pennsylvania advantage."

Additionally, because state income taxes can be subtracted from federal taxable income, taxpayers who itemize deductions can receive as much as a 35 cent reduction in federal taxes for each dollar increase in state income taxes. This would make a tax increase even less harmful to employment than deep spending cuts.

Pennsylvania could target its income tax increase to higher-income earners, through a differentially higher tax on investment income (such as dividends, capital gains, and net profits), Price noted. This can be done in Pennsylvania without a constitutional change because each component of investment income is a separate "class" of income and thus may be subject to a different tax rate under the state's constitutional uniformity clause.

Price also noted that state spending financed through bonds -- in effect, through future state revenues -- can be especially stimulating to the state economy in the short run, one reason that bond-financed water and sewer infrastructure and the state's $650 million Alternative Energy Investment Fund are so well timed.

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SOURCE Keystone Research Center
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