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Tennessee lawmakers are seriously considering repealing their state estate tax, in part because of a comically flawed report from supply-side economist Arthur Laffer. The report’s bottom-line conclusion is that Tennessee would have benefited from 220,000 more jobs in 2010 if lawmakers had simply repealed the Tennessee estate tax one decade earlier. But as the Institute on Taxation and Economic Policy (ITEP) explains in a new brief, while 220,000 jobs is certainly an impressive number, the reasoning Laffer used to arrive at that figure is far from convincing.
Laffer begins his argument by pointing to the “Laffer-ALEC State Competitiveness Index,” which is basically a wish list of fifteen conservative policies he would like to see states enact (low income taxes, low corporate taxes, low minimum wage, etc). Tennessee ranks 8th overall on the Laffer-ALEC Index, and if the Index has any predictive power whatsoever, that means Tennessee’s economy should be doing pretty well. But as Laffer admits, the reality is exactly the opposite.
Tennessee’s low economic and employment growth is particularly puzzling to Laffer because in a series of prior reports, he’s argued that states without income taxes (of which Tennessee is one) are outperforming the rest of the country. So how then does Laffer explain Tennessee’s disappointing growth? He decides to ignore a slew of factors that affect state economies in today’s complex world, and instead place all of the blame in one place: the state estate tax.
According to Laffer’s reasoning, if Tennessee had jettisoned its estate tax one decade ago, employment and economic growth more broadly would have sped up to a rate exactly equal to the average among all states not levying an income tax. The natural result of this would be 220,000 more jobs in 2010, as well as $36 billion in additional yearly economic output.
Laffer says he can think of “no reason to believe” that things wouldn’t have played out this way. But as ITEP explains in its brief, differences in economic growth rates are influenced by a range of factors that don’t appear to have even crossed Laffer’s mind, like differences in natural resource endowments, educational attainment, and infrastructure quality. The unavoidable conclusion is that Laffer’s choice of scapegoat in Tennessee had a lot more to do with his ideology than with any sort of rigorous economic analysis.
For a closer look at Laffer’s deeply flawed argument in favor of repealing Tennessee’s estate tax, be sure to read ITEP’s full brief.
Photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0