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Why state tax cuts aren't driving job growth

When Wisconsin Gov. Scott Walker delivered his State of the State address in January 2013, he promised that an agenda of budget cutting, reduced taxes and less business regulation would result in a better economic climate and more jobs for his state.

"Unlike the message coming out of Washington, I believe that putting more money in the hands of the people — instead of the government — is good for the economy," said the Republican governor, who is known as a reformer.

Read More32 states trail US as a whole in job recovery

Wisconsin Gov. Scott Walker.
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Wisconsin Gov. Scott Walker.

Walker is just one of several Republican governors who, with the help of friendly Republican-dominated state legislatures, have spent the past few years slashing taxes – particularly on businesses – and cutting spending. States like Kansas and North Carolina have undertaken similar efforts, and at least in part, the justification has usually been that lowering the tax burden will attract new businesses, which will in turn create new jobs.

In 2012, Kansas Gov. Sam Brownback wrote that his state's tax cuts would be "like a shot of adrenaline into the heart of the Kansas economy" that would "pave the way to the creation of tens of thousands of new jobs, bring tens of thousands of people to Kansas, and help make our state the best place in America to start and grow a small business."

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In July of 2013, North Carolina Gov. Pat McCrory made similar promises when he signed a bill lowering personal and corporate tax rates, and cutting state spending.

"This reform will put money in the pockets of North Carolinians," McCrory said. "It sends a positive signal to our citizens and most of all to job creators that North Carolina is open for business. Our goal is to get people in jobs and back to work."

On its face, it seems like a no-brainer. If a business is looking to relocate, all things being equal, a state that is going to take less of its profits in taxes is going to be more attractive. The "How Money Walks," website, for instance, is dedicated to tracking the migration of individuals from high-tax to low-tax states.

The trouble is that the promised job growth hasn't really materialized.

To be sure, with the U.S. economy as a whole adding jobs at a pace of 250,000 per month, there aren't many states seeing a downturn in employment anymore. But the promises that went along with the tax cuts and reduced spending weren't about keeping up with the rest of the country, but about surging ahead.

Walker, for one, predicted not just job growth, but growth that would outpace neighboring states like Illinois and Michigan. McCrory and the North Carolina legislature made sure that their state's tax rates were cut to a level below that of its neighbors for a similar reason.

But the dramatic tax cutting doesn't appear to have done nearly as much for job growth as promised.

The Milwaukee Journal Sentinel says that Wisconsin ranked 35th of the 50 states in job growth during the first three years of Scott Walker's term, and dead last among its immediate neighbors, including, Minnesota, Illinois, Indiana, Iowa, Michigan and Ohio.

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Kansas hasn't fared much better. According to the Center on Budget and Policy Priorities, the state's rate of job growth has lagged the national average since Brownback's tax cuts took effect.

North Carolina, at least, matched the national average in job creation in 2013. But the total number of jobs added to the state's economy in the second half of the year – when the tax cuts went into effect, was actually smaller than the total number added in 2012.

In fact, there's not a lot of academic consensus about the real impact of tax rates on job creation. While the prima facie case that lower taxes boosts job creation seems strong, there are secondary effects from cutting taxes that may reduce a state's attractiveness to businesses.

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Kansas, for example, has cut funding for education and infrastructure – both potential negative factors for businesses looking for a high-skilled workforce and reliable public services.

"Organizations advocating lower and less progressive taxes can find some studies by reputable economists that find that above-average state and local taxes have a measurable and consistently adverse impact on state economic performance," writes CBPP's Michael Mazerov. "However, many equally reputable studies reach the opposite conclusion, and the results of many more are mixed, ambivalent, or show that any adverse impacts are small. There is simply no consensus whatsoever that cutting taxes is a good strategy to boost state economic growth and create jobs."

— By Rob Garver, The Fiscal Times

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