Ask the Republican and Democrat running for Governor how Virginia’s economy is faring, and you’ll get two very different answers.
Democrat Ralph Northam says the state’s doing well, pointing out that unemployment is the lowest its been in almost a decade. But Republican Ed Gillespie highlights slow economic and wage growth to paint a bleaker picture. And to turn things around, he’s proposing the state’s first tax cut in more than 40 years.
A food cart outside Richmond’s downtown hospital attracts nurses, doctors and security guards. It was there we met a few people willing to join in a tax cut thought experiment.
We asked how much money they made, and plugged some numbers into a calculator to figure how much they’d save* under a tax cut proposed by Republican candidate for Governor Ed Gillespie. Then we asked what they’d do with those savings.
Virginia’s highest income tax bracket begins at $17,000. Gillespie’s plan would slowly scale in a cut from the current rate of 5.75% to 5.15%.
Amal is an IT and business contractor who makes about 90,000. Under the plan, he would save $540 a year in state income taxes.
“I might save, for buying a house I guess,” Amal said. “That would be my first priority. Second one would be a gadget. Like iPad or something like that.”
Phil is security officer who makes about $20,000. He says he’d like to use his approximately $100 in savings to go towards a car.
Sarah, a nurse who makes $56,000, would get back $336 a year. She says she’d save, as does Roy — a medical librarian.
“Bank it. Save it,” Roy admitted. “I probably would not stimulate the economy with it. Which is probably what he wants me to do.”
That’s exactly what he wants you to do. Gillespie is hoping a cut in the personal income tax rate will result in more spending and more jobs.
But Sally Hudson, an economist at the University of Virginia, is doubtful.
“When you think about what someone does with more money when they’re already at the top end of the income distribution, it’s not doing the kinds of things that necessarily generate jobs in Virginia,” Hudson said.
Instead, says Hudson, tax cuts that give a greater percentage back to low-income earners are more likely to incentivize people to jump into the job market if they haven’t already, or take on more hours.
Tom Perriello, who ran for the Democratic nomination for Governor, proposed something like that. But Ralph Northam, who won and is now the nominee, doesn’t have a detailed tax plan. The only proposal he's made is to cut the state grocery tax.
But a tax plan like Gillespie’s, that gives back an additional $540 to someone who makes $90,000? That isn’t the kind of policy that makes a dent, said Sally Hudson.
“It’s hard to overstate how strong the professional consensus is that these kinds of tax cuts do not generate job growth,” said Hudson.
But one of the economists that argues they do is Paul Bachman, with the right leaning Beacon Hill Institute. His group was responsible for an analysis of Gillespie’s tax plan, used to promote the proposal by the campaign.
The Beacon Hill Institute predicts the tax cut will create more than 50,000 new jobs.
“We’re talking about an increase in the private labor market of 1.6-percent,” Bachman said. “If you’re one of the 50,000 people that become employed because of it in five years, well then it’s like the old joke about the difference between a recession and a depression. A recession is if my neighbor loses his job or her job. A depression is if I lose my job.”
Bachman’s group ran a similar analysis on a tax cut in Kansas back in 2012. They predicted tens of thousands of new jobs and a modest reduction in state revenue.
The reality? The state had slower than average job growth and hemorrhaged revenue. Kansas had to borrow a billion to make sure they could pay retired state employees, public schools shortened their academic year, and the state legislature wound up reversing the cuts.
But Bachman says the problem was that politicians didn’t slow spending to match the tax cuts. He says he never claimed that tax cut would pay for itself, and he doesn’t suggest the Gillespie one will either.
“If a Gillespie administration is prepared to slow the growth of spending to accommodate the tax cuts and they go into that with eyes wide open then I think they won’t find that problem,” said Bachman.
In an interview, Gillespie recognized the state would need to reduce the rate at which spending grows year over year to pay for a tax cut, and says he would work with state lawmakers on that.
But lawmakers may have a tough time deciding exactly what to slow spending on. Public school funding still hasn’t caught up to where it was before the recession. The cost of providing health insurance for the poor is rising. And for two years running, lawmakers have had to dip into savings to balance the budget.
Gillespie said the fact that Virginia faces those difficult decisions is a sign our economy is struggling. A tax cut, he added, would be a step towards revival.
*Our analysis of savings differs somewhat from the campaign’s literature. That’s because the analysis done by the Beacon Hill Institute assumes wages will rise under the tax plan, and the final savings are based on those higher wages. We calculated savings based on someone’s current wages.