(The following commentary was originally published in the Oct. 18 Lansing State Journal.)
Consider a shopping mall that is losing tenants because its rent is higher than nearby malls.
As vacancies increase, customer traffic falls, making business worse for the remaining stores. Eventually those stores threaten to leave unless their rents are lowered. The mall owner explains that with all the vacancies he’s having trouble paying his bills at home. Nevertheless, he'll lower the rent — but only if customer traffic increases and vacancies are filled.
When store owners explain that traffic won’t pick up unless a lower rental rate creates an incentive for new stores to fill the vacancies, the mall owner gets huffy and tells them it would be irresponsible to cut the rent because his family's utility and cable TV bills are rising.
Fed up, more stores leave. Customer traffic declines further, so rents never come down. The vicious cycle accelerates, and eventually the mall owner not only can’t pay his bills, he can’t pay his mortgage, and has to sell his home at a loss. "Maybe I should have lowered those rents," he moans.
Now suppose that we’re not discussing a mall, but a state that’s losing jobs to competitors with lower taxes, and can’t attract new businesses for the same reason. The remaining employers ask for tax cuts. Legislative leaders agree, but make the reductions contingent on increased government tax revenue. They complain that it would be "irresponsible" to cut taxes when so much spending must be supported.
This parable illustrates what’s wrong with passing business tax cuts to improve the economy — but making them contingent on the economy improving. The purpose of business tax cuts is to remove an obstacle that discourages entrepreneurs from working, investing and taking risks here. Tax cuts contingent on government revenue "triggers" are an obvious Catch-22 that short circuits this incentive effect.
Yet that’s exactly what's now being discussed in the Legislature. As with the high-rent mall, bad public policy (including our worst-in-the-nation Single Business Tax) has created a vicious cycle where businesses close, reducing government revenue, causing the state to raise taxes and fees, leading to more closures, and so on.
There’s no certainty that modest business tax cuts already passed by the House will end this state’s economic death spiral. On the other hand, without some guaranteed tax cuts, why should anyone expect the decline to end? This is no time to make tax cuts contingent on higher government revenue "triggers."
Here's a better idea: Pass guaranteed tax cuts, and make government spending contingent on revenue triggers. A rising economic tide generated by lower tax rates will lift all boats — including the state government’s.
Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.