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Posts Tagged ‘Kansas’

Leftists don’t have many reasons to be cheerful.

Global economic developments keep demonstrating (over and over again) that big government and high taxes are not a recipe for prosperity. That can’t be very encouraging for them.

They also can’t be very happy about the Obama presidency. Yes, he was one of them, and he was able to impose a lot of his agenda in his first two years. But that experiment with bigger government produced very dismal results. And it also was a political disaster for the left since Republicans won landslide elections in 2010 and 2014 (you could also argue that Trump’s election in 2016 was a repudiation of Obama and the left, though I think it was more a rejection of the status quo).

But there is one piece of good news for my statist friends. The tax cuts in Kansas have been partially repealed. The New York Times is overjoyed by this development.

The Republican Legislature and much of Kansas has finally turned on Gov. Sam Brownback in his disastrous five-year experiment to prove the Republicans’ “trickle down” fantasy can work in real life — that huge tax cuts magically result in economic growth and more, not less, revenue. …state lawmakers who once abetted the Brownback budgeting folly passed a two-year, $1.2 billion tax increase this week to begin repairing the damage. …It will take years for Kansas to recover.

And you won’t be surprised to learn that Paul Krugman also is pleased.

Here’s some of what he wrote in his NYT column.

…there was an idea, a theory, behind the Kansas tax cuts: the claim that cutting taxes on the wealthy would produce explosive economic growth. It was a foolish theory, belied by decades of experience: remember the economic collapse that was supposed to follow the Clinton tax hikes, or the boom that was supposed to follow the Bush tax cuts? …eventually the theory’s failure was too much even for Republican legislators.

Another New York Times columnist did a victory dance as well.

The most momentous political news of the past week…was the Kansas Legislature’s decision to defy the governor and raise income taxes… Kansas, under Gov. Sam Brownback, has come as close as we’ve ever gotten in the United States to conducting a perfect experiment in supply-side economics. The conservative governor, working with a conservative State Legislature, in the home state of the conservative Koch brothers, took office in 2011 vowing sharp cuts in taxes and state spending, except for education — and promising that those policies would unleash boundless growth. The taxes were cut, and by a lot.

Brownback’s supply-side experiment was a flop, the author argues.

The cuts came. But the growth never did. As the rest of the country was growing at rates of just above 2 percent, Kansas grew at considerably slower rates, finally hitting just 0.2 percent in 2016. Revenues crashed. Spending was slashed, even on education… The experiment has been a disaster. …the Republican Kansas Legislature faced reality. Earlier this year it passed tax increases, which the governor vetoed. Last Tuesday, the legislators overrode the veto. Not only is it a tax increase — it’s even a progressive tax increase! …More than half of the Republicans in both houses voted for the increases.

If you read the articles, columns, and editorials in the New York Times, you’ll notice there isn’t a lot of detail on what actually happened in the Sunflower State. Lots of rhetoric, but short on details.

So let’s go to the Tax Foundation, which has a thorough review including this very helpful chart showing tax rates before the cuts, during the cuts, and what will now happen in future years (the article also notes that the new legislation repeals the exemption for small-business income).

We know that folks on the left are happy about tax cuts being reversed in Kansas. So what are conservatives and libertarians saying?

The Wall Street Journal opined on what really happened in the state.

…national progressives are giddy. Their spin is that because the vote reverses Mr. Brownback’s tax cuts in a Republican state that Donald Trump carried by more than 20 points, Republicans everywhere should stop cutting taxes. The reality is more prosaic—and politically cynical. …At bottom the Kansas tax vote was as much about unions getting even with the Governor over his education reforms, which included making it easier to fire bad teachers.

And the editorial also explains why there wasn’t much of an economic bounce when Brownback’s tax cuts were implemented, but suggests there was a bit of good news.

Mr. Brownback was unlucky in his timing, given the hits to the agricultural and energy industries that count for much of the state economy. But unemployment is still low at 3.7%, and the state has had considerable small-business formation every year since the tax cuts were enacted. The tax competition across the Kansas-Missouri border around Kansas City is one reason Missouri cut its top individual tax rate in 2014.

I concur. When I examined the data a few years ago, I also found some positive signs.

In any event, the WSJ is not overly optimistic about what this means for the state.

The upshot is that supposedly conservative Kansas will now have a higher top marginal individual income-tax rate (5.7%) than Massachusetts (5.1%). And the unions will be back for another increase as spending rises to meet the new greater revenues. This is the eternal lesson of tax increases, as Illinois and Connecticut prove.

And Reason published an article by Ben Haller with similar conclusions.

What went wrong? First, the legislature failed to eliminate politically popular exemptions and deductions, making the initial revenue drop more severe than the governor planned. The legislature and the governor could have reduced government spending to offset the decrease in revenue, but they also failed on that front. Government spending per capita remained relatively stable in the years following the recession to the present, despite the constant fiscal crises. In fact, state expenditure reports from the National Association of State Budget Officers show that total state expenditures in Kansas increased every year except 2013, where expenditures decreased a modest 3 percent from 2012. It should then not come as a surprise that the state faced large budget gaps year after year. …tax cuts do not necessarily pay for themselves. Fiscal conservatives, libertarians, …may have the right idea when it comes to lowering rates to spur economic growth, but lower taxes by themselves are not a cure-all for a state’s woes. Excessive regulation, budget insolvency, corruption, older demographics, and a whole host of other issues can slow down economic growth even in the presence of a low-tax environment.

Since Haller mentioned spending, here’s another Tax Foundation chart showing inflation-adjusted state spending in Kansas. Keep in mind that Brownback was elected in 2010. The left argued that he “slashed” spending, but that assertion obviously is empty demagoguery.

Now time for my two cents.

Looking at what happened, there are three lessons from Kansas.

  1. A long-run win for tax cutters. If this is a defeat, I hope there are similar losses all over the country. If you peruse the first chart in this column, you’ll see that tax rates in 2017 and 2018 will still be significantly lower than they were when Brownback took office. In other words, the net result of his tenure will be a permanent reduction in the tax burden, just like with the Bush tax cuts. Not as much as Brownback wanted, to be sure, but leftists are grading on a very strange curve if they think they’ve won any sort of long-run victory.
  2. Be realistic and prudent. It’s a good idea to under-promise and over-deliver. That’s true for substance and rhetoric.
    1. Don’t claim that tax cuts pay for themselves. That only happens in rare circumstances, usually involving taxpayers who have considerable control over the timing, level, and composition of their income. In the vast majority of cases, tax cuts reduce revenue, though generally not as much as projected once “supply-side” responses are added to the equation.
    2. Big tax cuts require some spending restraint. Since tax cuts generally will lead to less revenue, they probably won’t be durable unless there’s eventually some spending restraint (which is one of the reasons why the Bush tax cuts were partially repealed and why I’m not overly optimistic about the Trump tax plan).
    3. Tax policy matters, but so does everything else. Lower tax rates are wonderful, but there are many factors that determine a jurisdiction’s long-run prosperity. As just mentioned, spending restraint is important. But state lawmakers also should pay attention to many other issues, such as licensing, regulation, and pension reform.
  3. Many Republicans are pro-tax big spenders. Most fiscal fights are really battles over the trend line of spending. Advocates of lower tax rates generally are fighting to reduce the growth of government, preferably so it expands slower than the private sector. Advocates of tax hikes, by contrast, want to enable a larger burden of government spending. What happened in Kansas shows that it’s hard to starve the beast if you’re not willing to put government on a diet.

By the way, all three points are why the GOP is having trouble in Washington.

The moral of the story? As I noted when writing about Belgium, it’s hard to have good tax policy if you don’t have good spending policy.

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Something doesn’t add up. People like me have been explaining that California is an example of policies to avoid. Depending on my mood, I’ll refer to the state as the France, Italy, or Greece of the United States.

But folks on the left are making the opposite argument.

A writer for the Huffington Post tells readers that California is proof that the blue-state model can work.

Many factors contribute to California’s preeminence; one being its liberalism. Republicans don’t like to acknowledge California’s success. …The state’s job growth outpaced the nation’s in the first nine months of last year. California’s non-farm employment of 15.7 million people is at an all-time high. …California’s economy has thrived in spite of relatively high taxes and stringent regulations.

Meanwhile, a couple of columnists for the Washington Post are doing a victory dance based on recent California numbers.

…the…experiences of California…run counter to a popular view, particularly among conservative economists, that tax cuts tend to supercharge growth and tax increases chill it. California’s economy grew by 4.1 percent in 2015, according to new numbers from the Bureau of Economic Analysis, tying it with Oregon for the fastest state growth of the year. That was up from 3.1 percent growth for the Golden State in 2014, which was near the top of the national pack. …almost no one can say that raising taxes on the rich killed that recovery.

And let’s not forget that Paul Krugman attacked me two years ago for failing to acknowledge the supposed success story of job creation in California. I thought he made a very silly argument since the Golden State at that time had the 5th-highest unemployment rate in the nation.

But Krugman and the other statists cited above do have a semi-accurate point. There are some statistics showing that California has out-performed many other states over the past couple of years. Let’s look at the numbers. The St. Louis Federal Reserve Bank has a helpful website filled with all sorts of economic data, including figures from the Bureau of Economic Analysis on per-capita income in states.

I selected California for the obvious reason, but also Texas (since it’s often seen as the quintessential “red state”) and Kansas (which has become infamous for a big tax cut). And, lo and behold, if you look at what’s happened to per-capita income in those states, California has enjoyed the most growth.

Is this evidence that high taxes and a big welfare state are good for growth?

Hardly. California’s numbers only look decent because the state fell into a deep hole during the recession. And, generally speaking, a severe recession almost always is followed by good numbers, even if an economy is simply getting back to where it started.

So let’s expand on the above numbers and look at what’s happened not just over the past five years, but also since 2000 and 2005.

And if you look at California’s relative performance over a 10-year period or 15-year period, all of a sudden the Golden State looks a bit tarnished.

By the way, these numbers are not adjusted for either inflation or for cost of living. The former presumably doesn’t matter for our purposes since changing to inflation-adjusted dollars wouldn’t alter the rankings. Meanwhile, the data on cost of living would matter for comparative living standards (for instance, $46,745 in Texas probably buys more than $52,651 in California), but remember that we’re focusing on changes in per-capita income (i.e., which state is enjoying the most growth, regardless of starting point or how much money can buy in that state).

In any event, the numbers clearly show there’s more long-run growth in Texas and Kansas, and it’s long-run growth rates that really matter if you want more prosperity and higher living standards for people.

But let’s not stop there. Our left-wing friends frequently tell us that per-capita income numbers are sometimes a poor measure of overall prosperity since a few rich people can skew the average.

It’s better, they tell us, to look at median household income since that’s a measure of the well-being of ordinary people. And we can get those numbers (only through 2014, though adjusted for inflation) from the Census Bureau. What does this data show for Texas, California, and Kansas?

As you can see, California is in last place, regardless of whether the starting point is 2000, 2005, or 2010. In other words, California may have enjoyed some decent growth in recent years as it got a bit of a bounce from its deep recession, but it appears that the benefits of that growth have mostly gone to the Hollywood crowd and the Silicon Valley folks. I guess this is the left-wing version of “trickle down” economics.

Perhaps most interesting, the short-run numbers show that tax-cutting Kansas has a comfortable lead over tax-hiking California.

If that trend continues, then over time we can expect that the long-run numbers will begin to diverge as well.

Let’s close by looking at some analysis about those two states for those who want some additional perspective.

Victor David Hanson, a native Californian, has a pessimistic assessment of his state. Here’s some of what he wrote for Real Clear Politics.

The basket of California state taxes — sales, income and gasoline — rates among the highest in the U.S. Yet California roads and K-12 education rank near the bottom. …One in three American welfare recipients resides in California. Almost a quarter of the state population lives below or near the poverty line. …the state’s gas and electricity prices are among the nation’s highest. …Current state-funded pension programs are not sustainable. California depends on a tiny elite class for about half of its income tax revenue. Yet many of these wealthy taxpayers are fleeing the 40-million-person state, angry over paying 12 percent of their income for lousy public services. …Connecticut and Alabama combined in one state. A house in Menlo Park may sell for more than $1,000 a square foot. In Madera three hours away, the cost is about one-tenth of that. In response, state government practices escapism, haggling over transgendered restroom issues and the aquatic environment of a 3-inch baitfish rather than dealing with a sinking state.

The bottom line is that he fears the trend line for his state is moving in the wrong direction.

John Hood takes a look at why the Kansas tax cuts have resulted in budget turmoil, while tax cuts in has state of North Carolina haven’t caused much controversy.

How did Kansas and North Carolina end up in such different conditions? For one thing, while the two states both enacted major tax cuts, they weren’t structured the same way. Kansas punched a large hole in its income-tax base by excluding self-employment income. North Carolina briefly created a version of this exclusion in the immediate aftermath of the Great Recession, but then wisely eliminated it in favor of applying a low, uniform tax rate on a broad base of personal income. In Kansas, lawmakers also allowed themselves to be bamboozled by some out-of-state tax “experts” claiming that cutting income taxes would generate so much new investment, entrepreneurship, and population growth that the revenue loss to the state would be substantially offset. This can actually be true, of course — in the very long run, counted in decades. In the short run of state budgeting, however, policymakers are better off making far more conservative assumptions about revenue feedbacks. …Our state policymakers didn’t just reduce and reform taxes. They also controlled expenditures. Since the enactment of the 2013 tax changes, their authorized budgets have never pushed spending growth above the combined rates of inflation and population growth. Actual spending, in fact, has often come in below even these budgeted amounts.

John’s message is that pro-growth tax cuts don’t generate overnight miracles. Lawmakers have to be prudent when calculating Laffer Curve feedback. And they also should make sure there is concomitant restraint on the spending side of the budget.

The bottom line is that the Kansas tax cuts are good for the state’s economy, but they might not be sustainable unless politicians don’t quickly make reforms to cap spending.

P.S. Closing with some California-specific humor, this Chuck Asay cartoon speculates on how future archaeologists will view California. This Michael Ramirez cartoon looks at the impact of the state’s class-warfare tax policy. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.

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I was in Montreal last week for a conference on tax competition, where I participated in a debate about whether the corporate income tax should be abolished with my crazy left-wing friend Richard Murphy.

But I don’t want to write about that debate, both because I was asked to take a position I don’t really support (I actually think corporate income should be taxed, but in a far less destructive fashion than the current system) and because the audience voted in favor of Richard’s position (the attendees were so statist that I felt like a civil rights protester before an all-white Alabama jury in 1965).

Instead, I want to highlight some of material presented by Kansas Governor Sam Brownback, who also ventured into hostile territory to give a presentation on the reforms that have been implemented in his state.

Here are some slides from his presentation, starting with this summary of the main changes that have taken place. As you can see, personal income tax rates are being reduced and income taxes on small businesses have been abolished.

By the way, I don’t fully agree with these changes since I think all income should be taxed the same way. In other words, if there’s going to be a state income tax, then the guy who runs the local pet store should pay the same rate as the guy who works at the assembly plant.

But since the Governor said he ultimately wants Kansas to be part of the no-income-tax club, I think he agrees with that principle. When you’re enacting laws, though, you have to judge the results by whether policy is moving in the right direction, not by whether you’ve reached policy nirvana.

And there’ no doubt that the tax code in Kansas is becoming less onerous. Indeed, the only state in recent years that may have taken bigger positive steps is North Carolina.

In any event, what can we say about Brownback’s tax cuts? Have they worked? We’re still early in the process, but there are some very encouraging signs. Here’s a chart the Governor shared comparing job numbers in Kansas and neighboring states.

These are positive results, but not overwhelmingly persuasive since we don’t know why there are also improving numbers in Missouri and Colorado (though I suspect TABOR is one of the reasons Colorado is doing especially well).

But this next chart from Governor Brownback is quite compelling. It looks at migration patters between Kansas and Missouri. Traditionally, there wasn’t any discernible pattern, at least with regard to the income of migrants.

But once the Governor reduced tax rates and eliminated income taxes on small business, there’s been a spike in favor of Kansas. Which is particularly impressive considering that Kansas suffered a loss of taxable income to other states last decade.

But here’s the chart that is most illuminating. In addition to being home to the team that won the World Series, Kansas City is interesting because the metropolitan area encompasses both parts of Missouri and parts of Kansas.

So you can learn a lot by comparing not only migration patters between the two states, but also wage trends in the shared metropolitan area.

And if this chart is any indication, workers on the Kansas side are enjoying a growing wage differential.

So what’s the bottom line?

Like with all issues, it would be wrong to make sweeping claims. There are many issues beyond tax that impact competitiveness. Moreover, we’ll know more when there is 20 years of data rather than a few years of data.

That being said, Kansas clearly is moving in the right direction. All you have to do is compare economic performance in Texas and California to see that low-tax states out-perform high-tax states.

Indeed, if Kansas can augment good tax policies with a Colorado-style spending cap, the state will be in a very strong position.

P.S. This joke also helps explain the difference between California and Texas.

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