Can States Make Up for Tax Increases?

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Each day it becomes more likely that Americans face higher taxes, as the battle over the fiscal cliff appears almost certain to stretch into 2013. Many economists expect higher taxes to effect lower class Americans more than middle and upper class ones. This is not so much because of the taxes themselves, but because of the recession they may cause and its effect on national employment. Those who can least afford economic trouble may suffer through yet another drop in gross domestic product. Some states quickly have begun to partially solve the lower class economic problem, whether or not they intend to, through increases in minimum wage requirements. But the actions may not be successful.

The National Employment Law Project reports that “the minimum wage will increase in ten states on Jan. 1, modestly boosting the incomes of nearly one million low-paid workers.” The states clearly will not face the drag this may place on the overall economy, at least not directly. However, businesses that pay extremely low wages in Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Rhode Island, Vermont and Washington do face a drag. In these states, the minimum wage will rise an average of $0.15 an hour, which will add to their expense bases.

The argument that a higher minimum wage will offset federal tax increases and help keep the national economy moving forward is not clear-cut. One group claims:

The increased consumer spending generated by these minimum wage increases will boost GDP by over $183 million, according to an  analysis by the Economic Policy Institute

However, the forecast may have a major flaw. Businesses that face higher employment costs often lay off workers. If there is any lesson from the previous recession, it is that one. Companies believe, in harsh times, they can wring additional productivity out of smaller workforces. This is usually married with moves to make more workers temporary and to employ fewer workers who get benefits.

In a difficult economy, lower wage workers pay for faltering GDP in one way or another. An increase in minimum wages may well be accompanied by “downsizing” across companies that employ many of these workers.

Douglas A. McIntyre

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