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July 10, 2015

According to every media account, Gov. Rauner won't entertain proposals to raise adequate tax revenue to fund core services, until the Democrat-controlled legislature accedes to his "pro-business" reforms.

In essence, these reforms involve: right-to-work initiatives that curtail the right to organize and to receive compensation predicated on prevailing wages; lowering workers' compensation costs by limiting rights to compensation for job-related injuries; and holding the line on property taxes.

Interestingly, while the media consistently refers to these initiatives as "pro-business," absolutely no coverage is devoted to delineating precisely how businesses would benefit. This is problematic, because it creates the misperception that because they're "pro-business," these reforms would create jobs and stimulate the economy. Which is contrary to what the evidence indicates can be expected. Here's why.

For starters, these reforms would be "pro-business" but only in the very narrow sense of enhancing short-term profitability by reducing labor and property tax expenses. Sadly, the data show that enhancing business profitability in this fashion engenders neither job growth nor broad economic expansion.

First, consider what the evidence says about the correlation between business tax cuts on the one hand and job growth on the other. There isn't one. Indeed, peer reviewed studies conducted by entities as diverse as the nonpartisan Congressional Budget Office, and the anti-tax, "pro-business" (to coin a phrase) CATO Institute and Kaufman Foundation for Entrepreneurship, all find no statistically meaningful correlation between tax policy and job creation.

Indeed, the only factor that bears a statistically meaningful correlation to incentivizing businesses to create jobs, is growth in demand for whatever those businesses are selling.

In fact, the crucial role demand plays in stimulating job growth helps explain why reducing labor costs doesn't generate job creation, while cutting those costs through "right-to-work" policies is downright counterproductive. Consider what happened in the "jobless" recovery that followed the Great Recession.

During the first three years of that recovery, corporate profits not only rebounded, they hit an all-time high. Meanwhile, wages paid to workers pretty much flatlined. Yet record profits combined with relatively low labor costs didn't result in job growth -- hence the sobriquet "jobless" recovery. The reality: despite being highly profitable, businesses didn't hire more workers because demand didn't grow sufficiently to merit adding payroll.

Meanwhile, growth in overall demand is very much driven by consumer spending, which accounts for some 68-70 percent of all economic activity. This in turn means the governor's right-to-work initiatives will be counterproductive from a job creation standpoint. After all, the data show that wages are lower in states that have right-to-work laws than in states that don't, while paying workers less than prevailing wages results in, well, less pay.

Hence, if enacted, these reforms would result in workers having less in their pockets to spend. And less consumer spending constrains job growth specifically and economic expansion generally.

The kicker: the spending cuts the governor proposes to address the multibillion dollar shortfall in the state's General Fund, particularly to health care and human services, will exacerbate the negative, private sector impacts that the evidence indicates will flow from his "pro-business" reforms. That's because those services are primarily provided by private sector workers, employed by private sector businesses.

Sure, those businesses are mostly nonprofits, but that doesn't make the jobs they provide any less real for the workers who have them or the communities that need them. But when funding is cut for those services, the nonprofit businesses which rely on that funding have no option but to reduce staff. Which is why the University of Missouri found that when states reduce spending on services to pay for tax cuts, the net impact on the private sector is always job loss. Always.

For proof, look at the havoc that tax and spending cuts created in Kansas.

No question Gov. Rauner sincerely desires to encourage job and economic growth. However, the "pro-business" policies he's proposed won't get the job done.

Ralph Martire, rmartire@ctbaonline.org, is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank.

Source: Daily Herald