[Congressional Record Volume 140, Number 52 (Wednesday, May 4, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: May 4, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                    LABORATORIES FOR ECONOMIC GROWTH

                                 ______


                           HON. DAVID DREIER

                             of california

                    in the house of representatives

                         Wednesday, May 4, 1994

  Mr. DREIER. Mr. Speaker, with the Federal Government's fiscal policy 
now paralyzed by the presumed economic trade-off between stimulating 
job creation and adding to the deficit, I thought my colleagues might 
like to see the following article. It outlines how the States are 
becoming the laboratories for tax initiatives that spur economic 
growth. The evidence accumulated by State pro-growth tax policies will 
ultimately affirm the long-held conviction that a reduction in the 
capital gains tax can expand economic growth without a loss of 
government revenue.

               Capital Gains Tax Cuts Lead to Prosperity

                         (By John E. Berthoud)

       While Washington, D.C., has shifted its policy initiatives 
     away from economic growth and has instead focused on tax 
     increases and federalizing health care, some states are 
     picking up where Ronald Reagan left off and are fighting for 
     a pro-growth fiscal agenda. A centerpiece of this movement 
     for economic growth is the effort to cut and even eliminate 
     state capital gains taxes.
       The historical leader in the field of cutting state capital 
     gains taxes is Wisconsin. For many years Wisconsin has 
     excluded 60% of the value of any capital gain from taxation. 
     Gov. Tommy Thompson (R.) sees this as a key reason for 
     Wisconsin's economic health. Thompson repeatedly touts his 
     capital gain break: ``What a tremendous arrow in my quiver 
     when I go out and talk to a business about Wisconsin.'' 
     Thompson has long argued that ``A Wisconsin that is 
     competitive makes Wisconsin a good state to be in business.''
       Thompson's pro-growth tax policies have spawned followers. 
     In 1989 Gov. Carroll Campbell (R.) pushed through a cut in 
     South Carolina's capital gains tax almost in half, from 7% to 
     4% in four years, to offset the 1986 federal capital gains 
     tax increase. ``That substantial increase hurt those who want 
     to sell a farm and retire on the proceeds, those who want to 
     buy a smaller house after children are grown and those who 
     need to sell stock for retirement income,'' according to Gov. 
     Campbell. As a result of Campbell's tax-cutting policies, 
     South Carolina has experienced impressive rates of economic 
     growth and job creation.
       Gov. Kirk Fordice (R.), recently rated by the Cato 
     Institute as the governor with the second-best fiscal record 
     (see Human Events, March 4, page 19), has made Mississippi 
     the first state in the nation to completely eliminate capital 
     gains taxation on in-state investments.


                  Kirk Fordice's `Mississippi Miracle'

       By signing his proposal into law March 23, Fordice has 
     added yet one more achievement to a remarkable record of 
     fiscal accomplishment. Fordice's conservative fiscal reforms 
     have in turn created economic growth so robust as to earn the 
     label the ``Mississippi Miracle.'' Ranked first by U.S. News 
     & World Report in economic performance, the state's 
     unemployment rate is below 5% and their new business growth 
     rate is fourth in the country. The elimination of the capital 
     gains tax will only further the progress. Fordice notes that 
     every $1 million in increased investment in Mississippi 
     generates $2.2 million in economic growth and 120 new jobs.
       While the United States as a whole stands to gain from 
     lower taxes on capital gains, given interstate competition 
     for business, states have an added incentive to lower capital 
     gains taxes. And the greater economic activity spurred by 
     lower capital gains taxes will generate enough state tax 
     revenues to pay for the loss caused by the tax cut. Fordice 
     notes, ``The economic history of the United States 
     demonstrates--repeatedly--that every time we cut taxes, 
     government revenues actually increase substantially--
     abolishing the capital gains tax would encourage 
     entrepreneurial activity, leading to the creation of 
     private sector jobs, a noticeable improvement in our 
     standard of living and a significant improvement in our 
     economic climate.''
       Jude Wanniski sees elimination of the capital gains tax in 
     the states as the key to economic growth in the 1990s. In 
     Wanniski's mind, there are both political and policy reasons 
     for putting capital gains tax elimination at the top of the 
     state agendas. In the context of New Jersey's proposed 30% 
     tax cuts, Wanniski states, ``The problem she [Gov. Christine 
     Todd Whitman] and her treasurer will have is that computers 
     will tell her that she will lose all this revenue. She will 
     have to find revenue offsets and savings and that will be 
     very painful. The correct way to do it would be to eliminate 
     the capital gains tax in year one. Then the revenue 
     projections would be exceeded as people cash in more capital 
     gains. First, do the easiest thing. The confidence would be 
     built up in the legislature and the people. It's like a log 
     jam in a river. You want to get the logs running.''


                Bipartisan coalition's pro-growth agenda

       While the forward momentum on capital gains tax reduction 
     may have shifted to the states, Washington has not completely 
     forgotten the lessons of the ``Seven Fat Years'' and some are 
     still working for a pro-growth agenda. A bipartisan 
     coalition--headed by Senators Richard Shelby (D.-Ala.) and 
     Connie Mack (R.-Fla.) and Representatives Dave Dreier (R.-
     Calif.) and Billy Tauzin (D.-La.)--has staked out new 
     political ground by establishing the Zero Capital Gains Tax 
     Caucus. Federal Reserve Chairman Alan Greenspan was one of 
     the first to argue for a zero federal capital gains tax: ``It 
     is easier to make the case to eliminate it entirely than it 
     is to merely reduce the rat  . . . It is a direct tax on the 
     nation's standard of living.''
       The caucus recently released a study by Gary and Aldona 
     Robbins that examined the economic and revenue effects of 
     different capital gains proposals. Elimination or reduction 
     in the capital gains tax would have substantial economic 
     benefits as well as positive dynamic revenue changes for the 
     federal government. But it would also have tremendous dynamic 
     revenue benefits for the states. The economic growth 
     resulting from elimination of the federal capital gains tax 
     would add $175 billion to state coffers over 1994-2000.
       Thompson and Fordice have recognized the potential economic 
     growth contained in the reduction or elimination of capital 
     gains taxes. And for all the effort that has gone into 
     cutting the federal capital gains tax, the nation may have to 
     wait until the results from these ``laboratories of 
     democracy'' make clear the relationship between lowering the 
     capital gains tax burden and robust economic growth.

                          ____________________