Economists Challenges Kicker Statement

Below is a letter from one of the most respected economists in Oregon responding to Senator Deckert’s comment on the kicker and the common phrase heard in the capitol that economists consider the kicker a waste. The letter was read this week on the Senate floor by Senator Jeff Kruse.

Dear Senator Deckert:

This eMail concerns economists’ views on corporate kicker policy and your statement on the floor of the Senate today: “Economists across the spectrum … agree: There is no better way to waste our money than through the corporate kicker.”

I respectfully disagree. An Oregonian article claimed wide support for eliminating the kicker by quoting two economists. In fact, however, the article misquoted one of those economists, Dr. Phil Romero, and the other economist quoted was in the employ of a beneficiary of public spending. In any case, the article hardly represented a canvas of economists’ views. To wit:

1. I am an economist, serving on the Governor’s Council of Economic Advisors, a former finance professor, and former research officer for the Federal Reserve System.
2. I am strongly in FAVOR of the corporate kicker, if we must have a corporate income tax.
3. The kicker imparts useful discipline on a system that otherwise is biased toward overspending. One need only look at the pattern of State spending during the dotcom revenue boom as evidence of this tendency. The kicker disciplines spending by creating an offsetting claim on revenues should those revenues be unexpectedly high.
4. Most importantly, the taxation of corporate income significantly impairs economic growth. A recent study at UC San Diego provided data indicating that elimination of a corporate tax rate the size of Oregon’s would increase economic growth by approximately 1 percentage point per year. This is roughly a 25-30% increase in growth per annum.

The bottom line is that we would be far better off eliminating the corporate income tax altogether. We would have higher real economic growth and higher personal income tax revenues attendant that growth. Further, Eliminating the kicker to create a rainy day fund is doomed in concept and practice:

1. It is not clear why government budgets should be more stable than private budgets. It is already the case, with the kicker and without any rainy day fund, that public employment in the state is 20% more stable than private employment.

2. Elimination of the kicker will loosen spending discipline and increase State spending.

3. Every day will be a rainy day. The rainy day fund will not stand against the (increased) desire to spend all available resources.

The business community was foolish, in my opinion, to offer a one-year concession of the kicker. The action on the Senate floor today to eliminate the kicker perpetually shows, as Machiavelli once said, “A prince never lacks legitimate reasons to break his promise.”

These opinions are my own, and not those of my employer.

Randall Johnston Pozděna, PhD