The Buckeye Institute’s Tax Revolution

National Review
By John J. Miller
May 11, 2023 

THE south-facing windows of Rea Hederman’s 13th-floor office present a grand view of Ohio’s state capitol, but he and the number-crunchers who work with him spend most of their time staring at equations scribbled on whiteboards and gazing at lines of code on computer screens. “We’re always trying to answer a single question,” says Hederman. “Is this tax policy better than that one?”

They constitute the Economic Research Center of the Buckeye Institute, a free-market think tank that focuses on the statehouse across the street. Yet Hederman and his team also enjoy a growing national profile because of what they claim to have accomplished in recent years: They say they’ve saved taxpayers in Ohio and several other states nearly $6 billion.

Their secret weapon is STELA — State Tax and Economic Long-run Analysis — a proprietary computer model that forecasts the results of tax and budget policies in the states. It predicts not only how changes in tax rates would alter revenues but also how they’d affect job growth, business investment, and consumer spending. While these kinds of estimates already inform debates in Congress, they are rare outside the Beltway, where the effects of tax reform are tougher to calculate. Advocates who lack hard data often must resort to the mantras of their movement, such as the assertion that tax cuts pay for themselves, which is at best a half-truth.

Hederman and his colleagues provide something more useful than platitudes: evidence of how tax cuts, combined with spending restraint, can help economies flourish without emptying state coffers. Last year, the work of the Economic Research Center contributed to major tax victories for conservatives in Iowa and Louisiana. Today, as supply-siders dream of a future in which Republican-led states wipe out their income taxes entirely, Hederman and the Buckeye Institute could become the country’s most important agents of tax reform.

The 51-year-old Rea Smith Hederman Jr. was born to an old newspaper family in Mississippi. When he was a boy, his relatives sold most of their media holdings to Gannett. His father and namesake bought a storied left-wing intellectual periodical, the New York Review of Books, which the elder Hederman continues to own and to serve as publisher. The son also departed Mississippi, attending the University of Virginia, where he majored in history and political science. Then he found work in Washington, D.C., but at a home much different from his liberal father’s: the conservative Heritage Foundation, which in the 1990s was developing a data-analysis unit.

Hederman’s career move may seem odd for a young man with no training in economics, but that’s not how he sees it. “It’s really no different from what I had studied,” he says. “History is about asking how things happened, when they did, and why they did. Economics is about asking why people behave the way they do, and you work with primary-source material.” Back then, the Heritage Foundation’s source was the IRS. “Taxpayer data came to us in these cartridges that looked like VHS tapes,” says Hederman. He and his fellow think-tankers used this information, plus more from the Census Bureau and the Bureau of Labor Statistics, to build computer models that projected how tax reform would influence the U.S. economy. “It let us see how tax proposals would affect ordinary people,” says Hederman. “It also prepared us for tax fights in Congress.”

A big dispute in the late 1990s and early 2000s involved the evaluation of tax trade-offs. Traditionally, the government relied on economic models that were “static” and guessed merely how changes to the tax code would affect revenues. Heritage and others sought to create “dynamic” models, which offer revenue estimates but also perform the trickier task of trying to gauge how proposals will shape human behavior. A dynamic model, for example, can recognize the paradox that high taxes might lead to lower revenues as taxpayers change investment strategies or even quit working.

An old axiom says that all models are wrong but some are useful — and over time most economists have come to agree that dynamic models are more useful than static ones. “The debate has shifted away from whether we should use dynamic scoring to how we should use it,” says Jared Walczak of the Tax Foundation. Virtually every analysis of the Tax Cuts and Jobs Act of 2017, for example, relied on some version of the dynamic modeling that the Heritage Foundation had pioneered.

By that time, however, Hederman had moved to Ohio and joined the Buckeye Institute, which is headed by fellow Heritage alumnus Robert Alt. The two men formed a friendship at Heritage when they participated in an internal leadership program, reading books on management and debating organizational strategies. Later, when Alt was in Columbus, he found himself thrown into a budget battle over Medicaid expansion.

“Everyone was flying blind,” says Alt. “Supporters of the expansion argued that each dollar of government spending creates jobs. There was no serious analysis of the long-term costs.” What Ohio needed, thought Alt, was the kind of dynamic modeling that the Heritage Foundation had been providing to Congress. “You can’t stop something with nothing,” he says.

Meanwhile, back at Heritage, Hederman was working on computer models that examined economic mobility. “We were asking whether people were doing better than their parents, whether the poor could make it into the middle class — the stuff of the American dream,” he says. The topic primed him to consider Alt’s offer to work for the Buckeye Institute, whose budget was a tiny fraction of the Heritage Foundation’s. Hederman took it as a personal challenge. “I was always talking about the importance of risk-taking,” he says. “I decided that I should practice what I preached.” He moved to Ohio in 2014 and started to build the model that today is STELA.

The best economic models involve complicated math, reliable data, and smart assumptions about how people and businesses will respond to tax incentives. It’s hard enough to do this well on the national level. It’s even harder in the states, given their different tax systems and the varying quality of their data. STELA was first calibrated for Ohio, where it amplified the voice of the Buckeye Institute during legislative sessions. Soon, however, Hederman applied STELA to other states — and it helped secure a pair of notable wins.

The first came in Wyoming, which doesn’t have an income tax and instead depends on taxing the oil, gas, and coal industries. “We’re a boom-and-bust state,” says Amy Edmonds, a former Republican state legislator. “Whenever there’s a bust, we face the threat of new taxes.” In 2016, following a bust, she contacted Hederman on behalf of the Wyoming Liberty Group, a free-market think tank. “They showed us how to avoid a tax increase,” she says.

Next came Alaska, another state that has no income tax and whose budget banks on the price of fossil fuels. During a downturn in 2018, it faced fresh calls for new taxes. “We needed experts who could talk about how these tax increases would affect jobs and growth,” says Bethany Marcum of the Alaska Policy Forum. “Nobody in the state had the capacity.” She contacted the Buckeye Institute, which adapted its dynamic model to the Last Frontier State and provided data on revenues, employment rates, and business growth that Marcum shared with legislators. “That was a game-changer,” says Marcum. “Those tax bills didn’t go anywhere.”

The Buckeye Institute’s general approach outside of Ohio is to work with fellow members of the State Policy Network, a consortium of state-based, free-market policy groups. “They have local knowledge and contacts,” says Hederman. “We deliver data, put out reports, and testify in hearings.” With STELA, Hederman and his colleagues can describe a range of tax scenarios and respond quickly to the requests of lawmakers. “If an official wants to tweak a tax rate in a legislative proposal, we can show what it means,” he says.

Wyoming and Alaska provided proof of concept, but these were defensive achievements. Tax reformers ultimately want to go on offense. That’s what Hederman and the Buckeye Institute did in Louisiana. “The state’s been struggling,” says Vance Ginn of the Pelican Institute, a think tank in New Orleans. “We’ve had low economic growth, and people are leaving. We need a comeback agenda.” Starting in 2017, the two institutes worked together to model several scenarios involving reductions in personal and corporate taxes. “This helped us see what could be done,” says Ginn. Last year, following the interruption of Covid-19, Republican legislators and the Democratic governor, John Bel Edwards, negotiated a budget that will lower tax rates if Louisiana hits certain revenue targets — and apparently it will, if lawmakers choose in the coming weeks to put a portion of a current surplus into a rainy-day fund. Whatever they do will almost certainly shape this fall’s gubernatorial race, which could involve candidates with competing pro-growth tax plans. In fact, a new report shows that by keeping spending limited to the rate of population growth and inflation, Louisiana could eliminate its income tax within a decade. 

Even better results came in Iowa. John Hendrickson of the Iowans for Tax Relief Foundation reached out to Hederman six years ago, when Republican governor Kim Reynolds had signaled an interest in cutting the state income tax. “We wanted to help her meet this goal, and the Buckeye Institute seemed like the first place to go for help,” says Hendrickson. “Rea helped us show legislators what was possible.” This led to big cuts in 2018 plus ongoing collaboration as STELA evaluated new scenarios for lawmakers to consider. Last year, Reynolds signed a sweeping plan that sets the state on a course for a flat tax by 2026, in what was probably the country’s biggest tax-reform victory since the pandemic. The next step is to abolish the state’s income tax entirely. “I’m hoping we can keep working with Rea,” says Hendrickson.

Hederman says he’s ready: “We’re saving America one tax model at a time.”