Articles and Updates
Growth Precedes Tax Cuts
"Correlations were run between Arizona’s growth rate and tax cuts. The correlation between current Growth and Tax Cuts lagged two years was significant at 1% level of significance. "
February, 2009
By Alberta H. Charney, Ph.D.
Senior Research Economist, Economic and Business Research Center
Introduction
The impression that tax cuts in Arizona encourage growth is wrong. Rather, tax cuts were made in response to rapid Arizona growth during periods of rapid expansion and revenue growth.
Two simple variables are compared:
- Real tax cuts ($2007): tax cuts, by year, reported by JLBC and deflated using the Consumer Price Index. Tax cuts are fiscal year (FY) figures.
- Growth rate: percent change of Arizona’s real GDP. GDP is inherently a calendar year (CY) figure.
Tax Cuts and GDP Growth
Correlations were run between Arizona’s growth rate and tax cuts. The correlation between current Growth and Tax Cuts lagged two years was significant at 1% level of significance. “Lagging” a variable means to move it back. Thus comparing current growth to tax cuts lagged one year means comparing CY1995 growth rate with FY1996 tax cuts, the CY2000 growth rate with FY 2001 tax cuts, and so forth. Thus a “one year lag” in tax cuts in this data actually corresponds to a 6-month lag between the growth rate and tax cuts because the fiscal year ending in, say, 1996 reflects the 2nd half of 1995 and the first half of 1996. Comparing current growth to tax cuts lagged two years means comparing the CY1995 growth rate with FY1997 tax cuts and comparing the CY2000 growth rate with FY2002 tax cuts. This “two year lag” actually corresponds to an 18 month lag between growth and tax cuts.
The following two graphs make it clear. Real GDP growth and real tax cuts are shown in Figure 1. Because real tax cuts are fiscal year and real GDP growth is calendar year based, the GDP growth in the graph is actually lagged behind the tax cuts variable by one-half of a year. That is, the year 2007 in the graph is associated with real tax cuts in FY2007 ending June 30, 2007, and real GDP growth for CY2007, ending December 31st. The axis on the left is for growth rates; the axis on the right is for tax cuts. Note that tax cuts are measured as positive numbers for graphing purposes, and tax increases are negative numbers (based on the right-hand axis). From this graph, it can be seen that tax changes have been in response to growth, not the other way around. One exception was the tax increases (positive tax “cuts” on right-hand axis) during the late 1980s/early 1990s that were concurrent with the negative or weak GDP growth during that period.
Figure 1
In Figure 2, the tax cuts are lagged two years. Again, this two-year lag actually represents 18 months. Tax cuts lagged two years (18 months) trace the growth in real GDP fairly closely. Again, the exception is the period during the late 1989/early 1990s recession, where the tax increases are concurrent with the recession so the lagged values diverge from the real GDP growth rate.
Figure 2
Exhibit 1: Development-Related Employment (Construction + Suppliers), AZ, 2007
| Year | Real GDP Growth Arizona |
Real Annual Tax Cuts |
Real Annual Tax Cuts Fiscal Year - Lagged 2 years |
| 1987 | 3.53% | (204,942.0) | |
| 1988 | 3.28% | (175,654.6) | |
| 1989 | -0.39% | (204,942.0) | (317,621.7) |
| 1990 | -1.02% | (175,654.6) | (14,336.5) |
| 1991 | 0.03% | (317,621.7) | 27,704.7 |
| 1992 | 7.06% | (14,336.5) | 35,532.5 |
| 1993 | 3.75% | 27,704.7 | 163,786.2 |
| 1994 | 9.11% | 35,532.5 | 376,057.1 |
| 1995 | 6.17% | 163,786.2 | 224,185.4 |
| 1996 | 5.63% | 376,057.1 | 217,446.0 |
| 1997 | 6.18% | 224,185.4 | 175,817.3 |
| 1998 | 6.36% | 217,446.0 | 126,117.8 |
| 1999 | 5.62% | 175,817.3 | 183,938.4 |
| 2000 | 3.27% | 126,117.8 | 37,992.5 |
| 2001 | 1.48% | 183,938.4 | (13,876.8) |
| 2002 | 2.31% | 37,992.5 | (62,971.7) |
| 2003 | 3.50% | (13,876.8) | 5,261.7 |
| 2004 | 3.53% | (62,971.7) | 18,512.6 |
| 2005 | 7.92% | 5,261.7 | 193,758.6 |
| 2006 | 6.55% | 18,512.6 | 209,701.4 |
| 2007 | 1.20% | 193,758.6 | 33,106.4 |
| 2008 | 209,701.4 | ||
| 2009 | 33,106.4 |
Source: Joint Legislative Budget Committee
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