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July 31, 2017

How to Address Rural Areas’ Economic Woes? Smart Investments, Not Tax Cuts

How can Virginia spur rural economic development? That’s the question on a lot of minds these days – and with good reason. Many communities in Virginia’s Southside and Southwest are struggling to cope with job losses and declining populations. More needs to be done to support these communities and make them more attractive to businesses. There are no easy solutions, and all too often, proposals to boost local economies rely on the old idea that tax cuts are the answer. As part of our work to educate and inform the conversations and debates in Virginia around sound fiscal policy issues, we took a look at the impacts that could be expected if such proposals were put into effect, and also at a different approach to addressing long-term prosperity.

As an economic development strategy, tax cuts are not an effective means of attracting businesses. A number of other criteria rank higher in businesses’ decisions about where to locate. Virginia’s Joint Legislative Audit and Review Commission found that “the five most important factors that businesses consider… are labor costs, union profile, highway accessibility, availability of skilled labor, and construction costs.” Similarly, corporate site selection professionals rank the availability of skilled labor, adequate land, and infrastructure higher than they rank taxes. These findings could be because state and local taxes typically represent a small share of overall business costs. In addition, across-the-board income tax cuts are poorly targeted and can put critical public services at risk, which could make an area less attractive to potential employers. And with the possibility of cuts in federal support for schools and other services states provide, states have additional reason to protect their own sources of revenue.

Real-world examples show that tax cuts don’t grow the economy or lead to faster job growth. The recent experience of Kansas is a case study in how tax cuts fail to boost state economies and result in a host of problems that jeopardize long-term growth. After sharply cutting taxes in an effort to strengthen its economy, Kansas’ income growth and job creation in those years lagged both the nation at large and their neighboring states. The tax decreases in fact led to significant cuts to the state’s schools and other services as well as credit downgrades from bond rating agencies. As a result, last month, Kansas lawmakers voted to reverse many of the tax cuts.

Rather than pursue tax cutting strategies with a poor track record, state and local officials could invest in better infrastructure and schools that create the foundations for stronger economies today and in the long term – and that create the environments that prospective businesses seek. For example,

  • Rural areas need greater investments to expand broadband access, which is associated with a range of benefits, including an increase in jobs, more businesses, higher incomes, and lower unemployment.
  • State and local governments should increase funding for early childhood education and K-12 schools. Additional funding represents an investment in the next generation and generates many long-term economic benefits. Increasing Virginia’s at-risk add-on for high-poverty schools would be an effective way of targeting such extra help to the schools and regions that need it the most.

To address the uneven economic expansion that Virginia has experienced, and in particular the needs of those areas that are not thriving, policymakers need to make sure families and businesses in every corner of the state have access to the high-quality education, support, and infrastructure they need. We have seen that tax cuts are ineffective in bringing job growth and strengthening weak economies. Instead, we need to invest in the strategies that create the foundations for thriving communities, job growth, and greater opportunity. 

Virginia’s rural communities deserve no less.

Budget & Revenue

Chris Wodicka

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