NEWS ANALYSIS : Will Tax Cuts Really Deliver on Promises? : State: Some analysts warn that Gov. Wilson’s proposed cuts will hurt, not help, the economy if they result in reduced services.

Gov. Pete Wilson’s proposal to cut personal and business income taxes will do little to encourage businesses to relocate or remain in the state, and could imperil future economic growth if it results in cuts in needed public services, policy analysts warned Tuesday.

Notwithstanding arguments from businesses and the Wilson administration that tax cuts will spur business expansion, recent studies suggest that such tax cuts have had marginal, if any, results in states where they have been tried, such as New York.

And at least one analysis of California’s public finances suggests that further tax cuts, coupled with inadequate local taxes because of Proposition 13, could further erode public spending, damaging chances for robust economic growth.

“To the best that we can tell, there is no correlation between a cut in taxes and economic growth,” said Richard Pomp, a professor of law at the University of Connecticut Law School in Hartford. “The amount that taxes represent to the cost of doing business is just too small to overshadow all the other differences that exist among the states.”

A spokesman for Wilson discounted such conclusions, citing the administration’s own raft of experts who believe tax cuts will have real benefits.

“We’re competing with states like Texas, Nevada and Arizona, who have very low tax rates,” said Sean Walsh, the governor’s press secretary. “To us, taxes aren’t the sole motivator for staying in the state, but they are a large motivator.”

Wilson’s proposal, presented in his state budget plan Tuesday, is to cut personal and business state income taxes 15% over three years.

In making the proposal, the governor joins a number of other states--notably Massachusetts, New York and New Jersey--that have cut taxes in the recent past, with mixed results.

In any case, and contrary to perceptions, California’s total tax burden for corporations is not unduly onerous, though the state ranks sixth among the states in per-capita corporate income taxes. That’s because it has relatively low property taxes, as well as a bevy of special loopholes and exemptions for businesses.

In 1989-90, the share of state and local taxes paid by businesses in California--31%--was close to the national average of 32%, a study by the Federal Reserve Bank of Boston found.

Indeed, California had the lowest tax burden on businesses among seven western states on the basis of total taxes paid as a share of gross state product, according to a 1992 study of business tax burdens by the Utah State Tax Commission.

California’s current corporate tax rate is 9.3%; its top personal income tax rate is 11% for a single filer earning more than $200,000 a year. Even without the proposed cuts, the top personal income tax rates were scheduled to decline automatically at the end of this year, back to 9.3%.

Even so, the state has shown itself willing to respond to cries from industry that California’s taxes are onerous.

In 1993, the Legislature passed a sales tax exemption for manufacturing investments. And starting next January, Wilson’s budget would offer individual and corporate tax cuts that would total about $7.6 billion over the next four years and come out of a projected $28 billion revenue growth.

But economists generally expressed doubt that the tax cuts would have the intended effect of stimulating new business.

State taxes are generally a small factor in a complex web of costs and other forces that influence a business’s decision on where to locate. In addition, a firm’s state income tax obligation pales when compared to other factors that determine a business’s health. In California, state and local taxes amount to only about 1% to 2% of a company’s operating expenses, studies show.

One of the most direct comparisons comes from New York, whose diverse economy is analogous to California’s and whose corporate taxes are even higher.

But when New York enacted tax cuts in the late 1980s, it failed to prevent the slowdown of an economy that had been experiencing its greatest period of job growth since World War II, said Frank Mauro, executive director of the Fiscal Policy Institute in Latham, N.Y., and former chief of staff of the New York state Assembly Ways and Means Committee.

A study of New York’s experience by Pomp at the University of Connecticut concluded that “changes in business taxes cannot be viewed as an effective means of influencing business locational decisions.” Because of that, the study added, the use of such tax incentives “probably results in a needless loss of state revenue.”

In New Jersey, the jury is still out, said Steven Gold, director of the Center for the Study of the States at the State University of New York in Albany. “Until this month, New Jersey had cut the income tax 5% . . . and another 10% cut took effect (Jan. 1). So there’s . . . not enough time to draw any conclusions,” he said.

Delaware would seem to support Wilson’s argument. It has reduced taxes from a high of nearly 20% to about 8% in the last decade and a half and has done well economically in that time, Gold said.

“But it also implemented policies to make itself attractive to banks to set up credit card operations, like repealing usury laws on interest rates, and that certainly had a big effect in stimulating its economy,” Gold said. In addition, Delaware’s economy is so small that a tax cut is more likely to have a marked effect.

None of this has dampened the enthusiasm of some California industry officials for the proposed tax cuts.

Barry Sedlik, manager of business retention at Southern California Edison Co., says his firm’s own economic analysis shows that the 1993 investment tax credit will eventually result in billions of dollars of new investment in the state. “We would assume that the benefits (of a tax cut) would be even larger, so we see it as a very big boon.”

“The idea of a tax cut . . . is very welcome to business,” said Ray Remy, president of the Los Angeles Area Chamber of Commerce.

But he withheld judgment about whether the cuts would impair the ability of the state to pay for adequate public services, particularly with the increased need for prisons under the new “three-strikes and you’re out” law, constitutionally mandated education spending and other costs.

Moreover, he said, a tax cut “in and of itself is not going to change the attitudes of a lot of businesses . . . to stay or come in. You have to combine it with tort reform, additional workers’ compensation reform. . . . You put that package together, and we get more and more competitive.”

* WILSONOMICS

Governor proposes $56.3-billion budget. A1