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Kansas sales tax study criticized

Wichita State University economist John Wong has produced a study showing that while an increase in the Kansas sales tax would kill jobs, it would result in less net job loss than a reduction in state spending. This differs from an earlier study which finds much greater job loss.

The difference between the two studies, as explained in a Kansas Watchdog story (Studies Agree: A Sales Tax Increase Kills Jobs) is that one study is a static snapshot covering just one year, 2011. The other looked at the long-range consequences of the tax increase. It should not be surprising that the long-term study found greater harm to the Kansas economy.

A Kansas Liberty story (Opposition blasts Wong report stating increase in taxes better than budget cuts, a premium article available only to subscribers) interviewed the author of the study that looked at long-term consequences of the sales tax increase. The author, Dr. Art Hall, who is Director of the Center for Applied Economics at the University of Kansas told Kansas Liberty that “the [Wong] study fails to take into consideration how Kansas residents would react to a tax increase.” He told Kansas Liberty: “This assumes that consumers will not respond at all to an increase in prices as a result of an increase in sales tax, even though there is a mountain of evidence to suggest that consumers will respond and it won’t be positively.”

The Kansas Liberty study continued to explain the difference between the two approaches:

Hall said that because of the core differences in how the studies were conducted comparing the two different reports was like “comparing apples to oranges.”

The main factor setting the two reports apart was that Wong did not take into account behavioral response, Hall said. ”

This is the real world and no one believes that people are robots and Professor Wong does not either but his model does, Hall said.

A second Kansas Watchdog story looks at the story behind the Wong sales tax study. Not surprisingly, it centers around many of the usual school spending boosters.

There are two points that neither news organization touched: One is whether we value government jobs or private sector jobs most highly. Certainly for government employees and those who thrive on government spending, the answer is easy. We ought to realize, however, that government jobs are paid for by extracting payment from the productive private sector. If government was more productive than the private sector, one might be able to make a case for expansion of government jobs. But such a case cannot be made. We should be looking to shrink the government sector and expand the private sector.

Second, the dual roles of Professor Wong ought to be considered. Wong is a member of the Kansas Consensus Revenue Estimating Group, a six-member team that estimates the revenue the state will receive in the future. Its estimates are the numbers that the legislature and governor must use when forming budgets. Wong’s membership in the revenue estimating group and authorship of a study promoting sales taxes, while not necessarily a conflict of interest, is nonetheless a little too cozy for my comfort.

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