Eager reader Wayne Booze sets the stage for a stunning argument in favor of adopting Senator Stanford Adelstein's temporary extra-penny summer sales tax (Senate Bill 174) instead of Governor Dennis Daugaard's 10% state budget cuts. In respsonse to my argument that raising taxes would be less painful than cutting state spending and services, Mr. Booze asks, quite logically, for some data on the impact of tax increases on jobs. Intrepid lifelong learner that he is, Booze goes and finds some.

Last year, Arizona held a special election to approve a temporary penny increase to their sales tax (the "Transaction Privilege Tax," they call it... since commerce apparently is not a right). Prior to the election, Dr. Alberta H. Charney, senior research economist at the University of Arizona Economic Business and Research Center, analyzed the potential economic impact of that sales tax increase versus comparable state budget cuts. Dr. Charney calculated that an extra penny sales tax, while raising $918 million in revenue, would cause the loss of 7,383 jobs, roughly 0.2% of the Arizona workforce at that time.

Dr. Charney then turned her slide rule toward the Arizona governor's proposed budget cuts of $867.6 million. Those cuts would cause the loss of 14,092 jobs in Arizona. The concomitant loss of $442.5 million in federal matching funds would bring the lost jobs total to 20,510, nearly 0.7% of the workforce.

Dr. Charney cites three main reasons why a sales tax increase has less economic impact than budget cuts:

  1. Government provides more services than goods, and service providers employ more people per dollar than non-service providers.
  2. Out-of-staters pay some of the sales tax (in Arizona's case, about 10%).
  3. The sales tax primarily hits taxes on tangible goods. Arizona doesn't produce lots of tangible goods. When the sales tax hike causes people to buy less stuff, out-of-state producers absorb some of the impact.

At the urging of Governor Jan Brewer, the people of Arizona approved the three-year extra-penny tax last May. It took effect June 1. Early data showed no apparent immediate economic slump. Arizona Department of Revenue data show taxable sales for October 2010 up 1.9% over October 2009 (if I'm reading their table right). State employment data show that Arizona currently had 0.6% more jobs in December 2010 (after a half-year of the temporary tax) than it did in December 2009.

South Dakota's mileage will vary, but Dr. Charney's analysis of tax hikes versus budget cuts should be on the table at Tuesday's thrice-delayed hearing on SB 174. Balancing the state budget will hurt, but an extra-penny sales tax will hurt a lot less than the governor's proposed budget cuts.