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SB 174: Budget Cuts Triple Job Losses Compared to Extra-Penny Sales Tax

Last updated on 2014.05.19

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.


  1. Michael Black 2011.02.18

    The governor has already commited to vetoing any tax increase. The veto is not the problem. Any tax increase must be passed by a two-thirds majority of both houses. That is highly unlikely. There has been talk of referring a tax increase to a vote of the people but a recent Argus Leader story highlights the constitutional problems of such an action.

    Law throws wrench in plan to put tax hike to vote - Putting issue on ballot may be unconstitutional

    The Constitution says taxes may be raised only through a two-thirds vote of both legislative branches - the bill won only majority approval - or by an initiative of the people. The Supreme Court said the Legislature's referral of a tax increase to a public vote "simply cannot constitute an initiative."
    Unless someone goes out and starts gathering signatures for a sales tax increase through the initiated measure process, it appears that the governor will get his way.

    Even if we do a sales tax increase later by a vote of the people, the school boards will be forced to cut programs, teachers and in the case of Brookings, maybe all sports to stay within whatever budget the legislature provides.

  2. John 2011.02.18

    Why not subsidize the buggy whip and blacksmith industries - we could bring back a lot of jobs . . . Thus reveals the poor logic in the tax increase argument - we continue doing the same thing yet expecting a different result. Economic disruptions are painful. Yet they are essential unless we want to further mire ourselves in a system of having people pretend to work and add value - when in reality they do neither, or little of either, while collecting a paycheck.

    It's long past time we reform the 19th century education system, state's delivery of services through too many counties, our overmanned-underperforming legislature, and our not-so higher education system.

  3. caheidelberger Post author | 2011.02.18

    The Legislature can do it, Michael. Governor Daugaard is perfectly willing to support tax increases for tourism and the arts: see HB 1248, which the House passed 64–3 yesterday, and his praise of that tax increase at the arts awards banquet Wednesday.

  4. caheidelberger Post author | 2011.02.18

    But John Kelley, no one is talking about real educational reforms. Governor Daugaard and Senator Russell Olson just want to hack 10% and let the chips fall where they may. Couple budget cuts with conrete plans for modernizing the education system and improving quality and outcomes, and we can talk. Your statement doesn't say anything about the logic of the tax-increase argument, which is simply this: both tax hikes and budget cuts cause pain, but tax hikes cause much less.

  5. Wayne B. 2011.02.18

    I'd be keenly interested in getting a little more than arm-chair analysis from this study. It would be awesome if we could get some economists from our higher education institutions to help us (and our Legislators) wade through this issue.

    I think both conservatives and liberals can agree that we want to do the least damage to our state as possible to ride through this crisis. I'm dubious that South Dakotans can indefinitely support a workforce where one in every five workers is employed by some level of government.

    However, getting that ratio to a more manageable level shouldn't happen overnight - eliminating positions and services without enough time for the private sector to adapt and absorb those workers could do immense harm to our state's tenuous prosperity.

    My intuition says an extra penny tax won't be near as harmful, but I hope our legislators are wise enough to work of something more than intuition. We need good information to make a decision as important as this, and unfortunately we need this information now.

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