The fundamentals matter: Part I

Successful economic development comes from low taxes and free enterprise

By Geoffrey Lawrence
  • Tuesday, November 30, 2010

Leftist pundits love to point out that Nevada, with what they perceive as a low-tax and business-friendly regulatory environment, leads the nation in unemployment — as if this provides conclusive evidence that high taxes and government spending are somehow requisite for prosperity.

They view the Silver State as an experiment in limited government that, over the past two years, has demonstrated the folly of the entire system.

Little recognition is given to the fact that Nevada, in reality, has been above the national median in terms of per-capita tax revenues, even though the bulk of revenues — in contrast to most other states — accrue to local governments.

Conveniently ignoring that Nevada is more significantly characterized by decentralization than by low taxes, leftist pundits falsely assert that Nevada's dire economic status is evidence that a business-friendly tax environment is insufficient to lure economic productivity to the state. Business-climate rankings and other "economic development" analyses are cited as evidence that a tax climate is but one of many factors considered by large corporations when deciding where to locate their operations.

As such, the argument goes, a more conducive strategy for economic growth would see the state legislature raise taxes significantly in order to provide greater state funding for items such as K-12 education, the Nevada System of Higher Education, commuter rail development, the provision of public parks and the like in the belief that greater state spending will boost the state's education levels and (arbitrarily determined) "quality of life" rankings. These factors, it is argued, are equally or perhaps even more important than the tax environment to large corporations looking to invest in a new location. Hence, higher taxes, counter-intuitively, could lead to faster economic growth.

There are multiple holes in this analysis. First, the almost exclusive focus placed on recruiting highly visible, large corporations as engines of job creation ignores the widely recognized fact that small businesses are the unquestioned dynamo of job-growth nationwide, creating an average of 3 million net new jobs nationwide every year. By contrast, large, established corporations tend to lose jobs over time.

Hence, the best "economic development" strategy would focus on fundamentals that foster small business formation — such as minimized tax and regulatory structures and the absence of legislation that artificially inflates labor costs. This approach is far superior to catering to the special interests of large corporations.

It is entirely true that worker educational attainment is crucial for some capital-intensive and technology-dependent industries. This is true for startup ventures as well as large corporations. However, the naïve assumption that greater state spending on public education will lead to a proportional increase in educational attainment is regularly falsified by experience.

Nevada has dramatically increased per-pupil spending on K-12 education in the past, but those spending increases have not translated into higher attainment levels. Over the past 50 years, the Silver State has nearly tripled per-pupil spending in inflation-adjusted dollars, according to data from the U.S. Department of Education.

What has been the return on this investment? Scores on the National Assessment of Educational Progress (NAEP) have remained flat. High school graduation rates have fallen from 77 percent as recently as 20 years ago to a paltry 52 percent today. The record is clear: Increasing state K-12 spending is an insufficient strategy for improving educational attainment and economic development in the Silver State.

Evidence from around the country suggests that structural reform of the educational system is a much more effective method of improving educational attainment and laying the foundation for a state's economic vitality. The basket of market reforms pursued by Florida in the late 1990s has produced significant gains in achievement without significantly increasing state outlays for education.

Advocates of state-centric "economic development" models should learn from this record that higher taxes and state spending are not the drivers of the economic growth they desire. The fundamentals matter, and that means ensuring a low and uniform tax burden. Educational attainment is important, but there are more effective methods of achieving this goal than through spending increases.

If the Silver State is to reclaim sustained economic vitality, policymakers need to understand the strategies that will achieve that goal and those that won't.

If free enterprise — unmolested by oppressive or intentionally manipulative tax instruments — is combined with an innovative and competitive range of educational choices, long-term prosperity will follow.

It has worked elsewhere. It would work in Nevada.

Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. For more visit

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