As the Kansas Legislature decides whether to balance the budget through reductions in spending or increases in taxes, two studies of the impact of a sales tax increase have emerged. The two arrive at different conclusions, and it’s important to understand the differences between them.
The earlier study was conducted by Art Hall, who is Director of the Center for Applied Economics at the University of Kansas. It found that increasing the sales tax rate would result in a large loss of jobs over six years.
So what is the difference between the two studies?
Kansas Watchdog’s Paul Soutar reported this: “Both economists were quick to point out that one study is not more correct than the other. They just use different tools to answer a slightly different question. Both agreed that Wong’s study is a static snapshot of the impact of the tax increase in 2011 and does not take into account changes in behavior caused by increased sales tax or project the impact beyond 2011 as does Hall’s.”
In Wong’s interview, he said that the model he used, IMPLAN, is a computer model based on input-output analysis. It seeks to answer the question of what happens when you change one economic variable?
Wong said that “Anytime you take money out of people’s pockets, that’s bad.” When there’s a cut in state spending, it is felt most directly by users of state services and by state employees who may lose their jobs. The impact is more localized, he said.
While low income people are affected proportionally more by an increase in sales tax, Wong said that low income people use a lot of state services, and their loss of these services might be greater than the extra sales tax they may pay.
Wong said that the Hall study did not take into account what would happen if the state reduced its spending. But in his interview Hall contradicted Wong’s contention that his study did not take into account the effect of the extra state spending that a higher sales tax would allow, saying that job losses would have been higher if the effect of government spending was not included.
In his interview, Hall said that his study looked at a six-year time frame. The findings are that the private sector loses 26,000 jobs, the public (government) sector gains 7,000 jobs, and private sector loses $2 billion in personal income.
Hall said that Wong’s computer model does not take into account the fact that people will react to tax increases. “It’s as if people are robots, and we know that’s not right,” adding that the model he used tries to account for this.
Hall further distinguished the two studies: “People do respond to price changes. That’s the core of economics. Professor Wong’s model does not even take that into account. It’s not Professor Wong’s fault. The tool he’s using was really built for other purposes. The tool we’re using is trying very explicitly to take into account what people do when taxes increase, or decrease, for that matter.”