Alan Essig
Georgia economist
October 2005

Overview: In this October interview with the Center for a Better South, Georgia economist Alan Essig talks about what Southern states can do to improve their financial positions through modernizing tax codes, investing in education and closing corporate loopholes. Essig is founding director of the Georgia Budget and Policy Institute in Atlanta, Ga.

BETTER SOUTH: Before Hurricane Katrina, Southern states faced strapped budgets in the short-term and structural deficits over the long-term, unless something is done to fix them. Now that Louisiana, Mississippi and Alabama -- along with other Southern states -- are facing numerous challenges wrought by the hurricane, what can state lawmakers do to strengthen their state's financial position?

ALAN ESSIG: Even before Hurricane Katrina, many Southern states faced structural gaps between revenues and expenditures. The Center on Budget and Policy Priorities listed Florida, South Carolina and Tennessee as states most at risk of a structural budget deficit. Alabama, Georgia, Kentucky and Mississippi were close behind. With the tax base of Louisiana and Mississippi directly impacted by the destruction of Hurricane Katrina and neighboring Southern states impacted by the expense of thousands of evacuees needing state services, structural deficits become even more of an issue.

Southern state legislators can take action in several ways to assure the fiscal and budgetary integrity of their states. First, it is more important than ever to assure that state funds are spent as efficiently and effectively as possible. Whether it is modernizing procurement or demanding program accountability, states must assure taxpayers that revenues are spent wisely. A dollar wasted on the inefficient purchasing of pens is a dollar we could be spending on educating our children.

Second, it is time to modernize state tax codes. Most state tax systems were put in place between 1930 and 1950. While the tax system has changed little in 60 years, the economy has changed a great deal. The tax system must be reformed to allow states to collect sufficient revenues in order to make the investments that a modern and growing 21st century state needs. Specifically the sales tax base can broadened and made relevant to the modern economy, and the corporate income tax can be strengthened by closing loopholes.

BETTER SOUTH: For a long time, the South attracted industries based on cheap labor, cheap land and cheap power. With the Mexicos, Chinas and Malaysias of the world, those days are over in a global economy. But to many in political power, they don't seem to get it that the "Don't Tax and They Will Come" philosophy no longer works. Talk some more about this and outline what will work.

ESSIG: State economic development policy must shift to a policy of ensuring an educated and trained workforce to attract businesses that offer the quality jobs of the 21st century. Southern states are not competing with each other for jobs as much as they are competing with China, India and Eastern Europe. As pointed out in a report issued by the Georgia Budget and Policy Institute titled, "Don't Tax and They Will Come: The Questionable Link Between Corporate Income Taxes and Economic Development," a quality workforce has a greater impact on the creation of quality jobs than the level of state taxation.

Economic development should focus on growing good jobs with livable wages and benefits for all residents. If the goals of economic development are people-focused, then the economic development tools should be as well. Bill Gates recently told an NCSL panel, "Again, I go back to education as really trumping all other things." When CEOs such as Bill Gates say that education outweighs tax incentives, states should take note.

A talented workforce is an economic development tool that rivals any tax incentive program, and that is where we need to focus our efforts. To compete with the Mexicos, Chinas and Malaysias of the world, Southern states need to produce more scientists, engineers and mathematicians.

Beyond education, there should be strategic investments in areas of greatest need. Certain areas require targeted spending to correct market imperfections and prepare those distressed communities for economic growth. Investments are needed in basic transportation and communication infrastructure, as well as job training. Where discretionary spending on economic development is appropriate, such spending should be tied to strong accountability principles such as wage and health care standards.

BETTER SOUTH: All of what you're talking about costs money. Can these investments be made without increasing taxes too much? And how?

ESSIG: Much of these needed investments can be made by redirecting funds currently spent on tax expenditures and by closing corporate tax loopholes. Most Southern states are expending hundreds of millions of dollars on tax breaks and incentives to businesses in the name of "economic development" and job growth. This economic development policy has not proven to be effective. It would be a much more effective and would have a greater long-term impact to instead invest those funds in human and physical capital (education, job training, infrastructure). States are also losing hundreds of millions of dollars through corporations that avoid their state tax obligations. The closing of corporate loopholes would help enable states to make needed investments in education and infrastructure.

BETTER SOUTH: Don't a lot of Southern states exempt a lot of stuff from sales tax? Seems like if they would broaden the sales tax base, they would generate additional revenues without raising rates -- and might even be able to drop rates....Is this a good strategy and are there other things like this?

ESSIG: Most Southern states tax very few services. As the economy continues to move from manufacturing to services, the goods-focused sales tax will continue to decline as a percentage of the economy. The declining sales tax is making it more difficult for states to fund the growing education and health care expenses. Broadening the sales tax base to include household services would increase state revenues by hundreds of millions of dollars. If raising revenues is not the goal, broadening the base would allow states to lower the sales tax rate. Either goal would result in improved tax policy.

Southern states should work with their congressional delegation to allow for the taxation of Internet sales, which are growing each year. The lack of a sales tax on Internet sales puts businesses located within a state at a competitive disadvantage. In Georgia, for example, it is estimated that Internet sales have cost the state treasury as much as $400 million per year with that number growing every year. Once again, if raising revenues is not the policy goal, taxing Internet sales would allow states to lower the sales tax rate.

BETTER SOUTH: If you were King of Southern Legislatures and could do three things to improve the South, what would you do?

ESSIG: First and most important is to improve education. The South trails the nation in most education outcomes. We must be willing to invest what is necessary in primary and secondary education to bring Southern states at least to the national average. In fact, excellence in education should be the ultimate goal.

Second, we must implement policies to ameliorate poverty, especially among children. The South has many of the most severe pockets of poverty in the country. Part of the solution is related to education. Improved education for all citizens of the South is the most cost-effective, long-term economic development strategy. In the short term, a strong social safety net is vitally important. It is morally repugnant that in the year 2005, children in the South still lack adequate food, housing, and healthcare.

Third, we must reform and modernize state tax systems. State tax systems must be made relevant to the 21st century economy. To make the needed investments in education and to strengthen the social safety net, tax systems must be developed that can fairly and equitably raise the necessary revenues.

© 2005, Center for a Better South.

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