Pence’s 10 percent tax cut is both affordable and necessary for economic competitiveness

by Ryan Streeter on March 16, 2013. Follow Ryan on Twitter.

Last week, the Indianapolis Star editorialized against Indiana Governor Mike Pence’s proposed 10 percent income tax cut using two common but flawed arguments.

First, the Star took the position that the state can’t afford a cut. Anytime anyone says a government can’t afford something, they hold assumptions about the value of government spending elsewhere. The truth is that a 10 percent tax cut is entirely affordable.

Second, the Star claims that a 10 percent tax cut isn’t all that relevant to economic growth. That flies in the face of the evidence.

The Star has published Pence’s rebuttal today. He addresses the two erroneous arguments here:

Despite this newspaper’s assertion that income tax relief is unnecessary for economic growth, the evidence suggests otherwise. Lower taxes will mean more jobs, and 27 states already have a lighter tax burden than Indiana. States with tax climates more favorable than ours are experiencing GDP growth well above the national average. They disproportionately lead the nation in population growth as they scoop up talent and investment that should be moving to Indiana — but isn’t.

Our tax cut is fiscally prudent. Our budget looks beyond the state’s two-year budget cycle and is based on the idea that spending should be sustainable and protect our reserves. In my budget, spending is more than a full point below inflation and reserves increase to $2.3 billion — even while giving millions of Hoosiers a tax break. By way of comparison, the recently passed House budget would reduce our reserves to $1.85 billion at the end of fiscal year 2014 and grow them back to more than $2 billion in fiscal year 2015 — with no new tax relief for Hoosiers.

The reserves in my budget are greater than the entire revenue decline we suffered in 2008-2009 when Indiana weathered the worst recession since the 1930s. Our goal must be to protect Hoosiers against future downturns while giving them the break they need now. The feast-or-famine problem the editors highlighted is not an unavoidable economic cycle. It is an outcome we can prevent by continuing to practice the fiscal discipline the editors praise.