Tax Cuts and Revenue Growth?

Source: New Mexico Comprehensive Annual Financial Reports, various years

Tax reform/relief is a complicated business.

In Washington, the Republican plan to cut income-tax rates, boost the standard deduction, and restructure the levies placed on business entities has produced the usual results. Supply-siders love the idea. The unlimited-government lobby is in panic. Many opponents have trotted out the predictable charge that tax cuts will balloon the national debt.

At nearly $20.5 trillion, concern about the balance on the nation’s credit card is warranted. But do tax cuts always “cost” government money? New Mexico’s experiment in slashing income-tax rates a decade and a half ago illustrates how — given the right conditions — the opposite can be true.

In 2003, then-Governor Bill Richardson pushed through a substantial tax-cut package. Over several years, the Land of Enchantment’s top income-tax rate was slashed by 40 percent — from 8.2 percent to 4.9 percent. In addition, a 50 percent deduction on capital-gains income was phased in.

Did revenue in the ensuing years decline? Hardly. As the chart above indicates, it grew, before falling off a cliff with the arrival of the Great Recession. The historic downturn cost New Mexico more than 50,000 jobs, a blow from which the state has yet to recover. Even worse, by enacting GRT hikes, increasing minimum wages, expanding the welfare state, doubling down on failed corporate-welfare measures, and refusing to pass a right-to-work law, the state’s pols have weakened the Land of Enchantment’s economic-development profile. (No wonder real income-tax revenue is lower than it was a decade ago.)

Even Paul Krugman has admitted that inflation-adjusted federal revenue, per capita, grew by 19 percent in the 1980s — a time of overall tax-cutting by the Reagan administration. More recently, North Carolina made a serious effort to “simplify the tax code, lower rates, and broaden the base.” The result? The Tar Hell State’s economy is strong and taxpayers have enjoyed “three consecutive years of budget surpluses.”

So it’s far from axiomatic that tax reform/relief = big deficits. Other factors — monetary policy, regulation, workforce skills, government expenditures, and demographic changes — play significant roles. Something to remember as the left wages a desperate campaign to retain the federal tax code’s dizzyingly complex architecture.

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