Christopher Thornberg: "We need to start paying attention to the unfunded stuff and stop worrying about the funded stuff."(On Record) (Interview)

• Author: Martel, Luke

Christopher Thornberg is founding partner of Beacon Economics LLC and one of the nation's leading economists. He's an expert in economic forecasting, regional economics, employment and labor markets, economic policy, and industry and real estate analysis. And, he was one of the earliest and most accurate predictors of the subprime mortgage market crash and global economic recession that began in 2007.

STATE LEGISLATURES: What are the biggest drivers of economic growth?

Thornberg: Consumers. There are more jobs out there, so incomes are rising, and consumers are borrowing more--a nice burst of things. The real estate market and construction market are also doing pretty well. Nonresidential and residential spending from a long-term perspective is still pretty far behind, but you're definitely seeing better numbers. New home sales, for example, are up and overall nonresidential construction is on a pretty good tear right now too.

What role does tax policy play in encouraging economic growth?

Not as much as people think. Some folks argue that tax policy is the single largest determinant of local economic growth, but the data show otherwise. It isn't to say that there aren't good taxes and bad taxes. But, in general, tax policy tends to have a limited role in determining which states succeed.

Why do you think states should expand sales taxes to more services?

There's a basic rule that good taxes are small taxes on a large basis. For a long time that was true for the sales tax; it was very broad-based. But there has been a big shift in consumer spending away from goods toward services. The response has been largely to increase taxes on goods. But that just pushes more people into services because those taxed goods become more expensive relative to services. It's better to broaden the tax base and reduce the rate on everything to, say, 3 percent. It's a way of widening and stabilizing what is a very important revenue source for state and local governments.

What do you think about the tax competition among states?

There are two kinds of economic development; fostering the growth and creation of new business, or poaching business from the guy next door. The latter option is a quick race to the bottom. States should compete by creating the best place to locate a business and let the chips fall where they may.

What can policymakers in slow-growth regions do to help jumpstart economies?

Well, it's tough. In the long run, it's not taxes, it's not a...