Utah clearly leads the nation in fiscal responsibility according to leading national economist Stephen Moore speaking through a Zoom connection at the 42nd Utah Taxes Now Conference. He planned to speak in person but without advance notice, the White House called on him to provide economic planning advice that day.
“We were working this morning on the data for 50 state unemployment rates, which just came out” Mr. Moore said. “What we found is that Red States had a very significant increase in jobs in the month of May while Blue States are really struggling. The data show just what Art Laffer and I had predicted: Red States like Utah, Idaho, Georgia, Florida, South Carolina, Texas and Tennessee, opened up while Blue States like New York, New Jersey, Illinois, Connecticut, and California continued with high unemployment.”
He said Red State unemployment is a little under 11% while Blue State unemployment is close to 15%. Still, he explained, unemployment numbers are actually understated because of the federal subsidies to keep people on the payroll. The true unemployment is higher than stated.
He explained that under the CARES Act, 60% of workers are being paid more not to work than when they were working, which will be a deterrent to a swift recovery. He said Speaker Nancy Pelosi’s negotiated ‘Super Unemployment Benefits’ last until the end of July, and there will likely be an unnecessary Phase 4. According to Moore, this could include infrastructure spending, sending everyone another check, and providing aid to states for COVID-19 expenses. He said any aid to state and local governments actually punishes Utah and other states which have been fiscally responsible, and therefore should be opposed.
Mr. Moore said he is a little more pessimistic about recovery than President Trump’s prediction of a V-shaped recovery, due to a lingering significant shutdown of the economy. He said we won’t see a significant rebound until the fall. Retail will be damaged for many years. Many stores and restaurants will not make it back at all. Because the hospitality industry is required to operate at 50% of capacity it’s difficult to make a profit when their business model requires at least 80-90%.
Mr. Moore explained his involvement over the years with Art Laffer and the American Legislative Exchange Council and the Rich States Poor States comparison of state economies. For each of the 12 years the study has been published Utah has had the best economic outlook. He said “That’s an amazing statistic, especially with competition from states like Idaho, Florida and Georgia and others. But they lag behind Utah because you do so many things right such as tax and spending restraints, balancing budgets, and very smart reforms such as pension reform.”
However, he said, there’s room for improvement: “Utah should be the 10th state in the nation that operates without an income tax. The nine states that have no income tax significantly outperform other states economically,” according to Moore. He noted that one of those states without an income tax, Florida, is a tourist state like Utah which taxes visitors through the sales tax. This is not only a fiscal point of view but a strategic point of view to tax outsiders, who benefit from visiting the state, in a more effective way.
Utah will continue to be a very rapid growth state over the next ten years as you have been over the last ten years, Moore said. “People are coming. People are leaving blue states and that acceleration is faster than in the past. I would suggest as you think about what you do with your tax system, you read what I wrote in the Wall Street Journal six months ago, about why Utah is the number one state.”
Mr. Moore described the economic boost created through the Tax Cuts and Jobs Act of 2017 which he, Larry Kudlow and Art Laffer and worked on with White House senior economic advisors to amend the Internal Revenue Code of 1986.
He explained that the plan dramatically cut regulations, cut individual income taxes, cut corporate tax from 35% down to 21%, and repatriated international businesses, bringing capital back to the United States tax free.
He said those policies resulted in the most beautiful economy in decades; that by January of 2020 we enjoyed the lowest unemployment and lowest inflation rates in over 40 years, with a whopping two-thirds of Americans saying the economy was on the right track.
Moore said this record rate of economic advancement lifted the quality of life for all demographic groups but he is proudest of what it has done for black Americans who achieved the lowest unemployment rate in 50 years and the lowest poverty rate ever.
Avoid Taxing Business Inputs
In responding to questions from the audience, Mr. Moore said that state tax policy should favor taxing sales over income taxes. “Sales taxes should be broad based, and the state should not pick winners and losers. At the same time, business to business goods and services should not be sales taxable.” He said when business inputs are taxed, it compounds those taxes at the final sale of the good or service.
In considering the Utah Legislature’s plan this interim to reconsider all sales tax exemptions, he said there needs to be a very good guidance system which helps to distinguish which are intermediate services or goods and which are final sales.
How Do We Pay for $5 Trillion CARES Act Debt?
One person asked whether there will be a large increase in taxes to pay for the CARES Act and how do we grow ourselves out of the debt?
Mr. Moore answered, “We are close to government spending being nearly 50% of GDP, which is beyond Bernie Sanders’ wildest dreams. More commerce flows through government than the private sector, hopefully that will be temporary. We are growing debt by $5 trillion this year to a total of somewhere near $26 trillion by the end of the year, a daunting number which will be a burden on future taxpayers.”
He said there are some offsetting benefits of the negative effects of the debt. First, interest rates are very low. The 30 year treasury is at a 1.5% interest rate. He suggested policymakers ought to consider locking in those low interest rates with 50 year bonds because in three or five years rates will go up.
He said the best plan for overcoming the national debt is pro growth economic policies. However, he said Joe Biden and Nancy Pelosi’s plan is major tax increases in 2021 including income tax, payroll tax, wealth tax, energy tax, and green taxes on carbon, which together will never pay for $5 trillion debt, we just have to grow the economy, he said.
Mr. Moore noted that the US lived through WWII with debt as high as it is now, we just need to make sure it’s not permanent
Should Capital Gains Be Taxed as Ordinary Income?
Mr. Moore said the proposal to tax capital gains as ordinary income would be catastrophic to the economy especially in the poorest neighborhoods. “What do the neighborhoods that are burning and with high poverty lack? Education and capital investment. The tragedy of the riots and burnings are turning capital away from those neighborhoods. And they’re not coming back. The Targets, WalMarts, and Walgreens are not coming back to those neighborhoods. Capital gains should not be taxed as ordinary income because it was already taxed at the corporate level; it should not be taxed twice.
In closing, Mr. Moore said, “The Utah Taxpayers Association is one of the most effective Taxpayer Groups in the United States and I applaud what you do.”