Unlike the federal government, which can run a deficit to cover the cost of its stimulus package, 49 of the 50 states are required by constitution or statute to balance their operating budgets .... states cannot simply enact new expenditures or tax cuts to be financed by increased borrowing. A reduction in revenue typically must be accompanied by a reduction in the spending that otherwise could occur.Since roughly four-fifths of all state spending comes in just four areas — education, health care, transportation, and public safety — it is likely that tax cuts would come at the expense of one or more of those services.
Cutting services to pay for “stimulus” tax cuts would not only harm the people who depend on those services, but also negate the stimulative impact on the economy. Recipients of the tax cut would have a bit more money to spend. But the recipients of state expenditure dollars, including public employees and contractors (e.g., teachers, construction workers, and health-care workers), would have less to spend. In terms of aggregate economic impact, the result likely would be a wash.
Indeed, such a tradeoff could actually hurt the economy. The lost jobs and income resulting from the spending cuts would outweigh the stimulus from the tax cuts if recipients save their tax cut or spend it out of state rather than injecting it into the local economy. This might occur, for example, if the recipients are multi-state corporations or relatively well-off individuals.
I find this mode of argument -- that tax cuts can do good in some circumstances and not others -- far more persuasive than arguments from those who assume that tax cuts, or tax increases, are always the answer.
