Best move for cash-strapped states? Raise progressive taxes.
Raising progressive taxes is a better move than budget cuts. It gets money moving through the economy again, jump-starting the economic recovery that is the principal engine of state fiscal health.
All but a handful of states have seen their revenues plunge since the great recession hit like a tsunami in 2008. State lawmakers have repeatedly slashed their budgets to address the massive shortfalls. But cutting to get out of fiscal crisis is tantamount to digging to get out of a crater.
Budget cuts deepen the recession and stifle recovery by immediately putting people out of work, reducing public and private investment, and abandoning residents in their hour of need. The long-term economic consequences are also damaging, including lost productivity, a less-skilled workforce, and reduced competitiveness.
The key to the twin goals of budget repair and economic recovery is significantly increasing progressive taxes.
Not "progressive" in a political sense of generally favoring taxation, but in the economic sense of taxing individuals and businesses based on their ability to pay – a viewpoint shared by Adam Smith, pioneer of market-based economics.
While naysayers claim that increasing taxes during a recession is unwise and counterproductive, it will work if you pick the right taxes.
Progressive taxation raises revenue, underwrites critical public investment, stimulates additional private investment, and maximizes job retention and creation. In the long run, progressive taxes are among the most sustainable revenue sources and result in more widely shared prosperity.
Of course, in a recession it would be better if the federal government sent funds to cash-strapped states – as Congress did to a limited extent in 2009 with the American Recovery and Reinvestment Act – or if states, like the federal government, could engage in unlimited borrowing.
Since neither of these are options, governors and state legislatures must realize they have at their disposal a sound and effective alternative to cutting their way out of the red.
Consider Virginia, a state that has cut its budget by $4 billion over the past 2-1/2 years to address a massive shortfall. Had Virginia lawmakers opted for progressive tax reform, they would have raised enough revenue to prevent virtually every painful cut, preserved jobs, and kept money flowing in the economy.