Supply-Side Doom in Kansas

Every year, right after the April 15 tax deadline, the U.S. Census releases its data on the prior year’s state tax collections. It is a fascinating document, filled with great data points for tax and policy wonks. It reveals a good deal about the state of local economies, economic trends and results of specific policies. In broad terms, the financial fortunes of the states are improving.

A quick excerpt:

State government tax revenue increased 2.2 percent, from $847.1 billion in fiscal year 2013 to $865.8 billion in 2014, the fourth consecutive increase, according to the U.S. Census Bureau’s 2014 Annual Survey of State Government Tax Collections.

General sales and gross receipts taxes drove most of the revenue growth, increasing from $258.9 billion to $271.3 billion, or 4.8 percent. Severance taxes increased 6.0 percent, from $16.8 billion to $17.8 billion, and motor fuel taxes increased 3.4 percent, from $40.1 billion to $41.5 billion.

You can read the full press release here or access all of the data directly from the Census.

There are some truly fascinating data points in the report:

• North Dakota had the biggest percentage increase in revenue, a gain of almost 16 percent, from $5.3 billion to $6.1 billion, as drillers and workers flocked to the region to participate in the fracking boom.

• Alaska had the largest decreases in revenue, a decline of $1.7 billion (34 percent), from $5.1 billion to $3.4 billion, as royalties from oil and gas leases plummeted.

• Kansas also had a big decline in revenue, falling 3.8 percent, from $7.6 billion to $7.3 billion. (Delaware had a 5.1 percent decline, second to Alaska in percentage terms, on revenue of just $100 million.)

Let's focus on Kansas, because of all the states its tax data reflects conscious policy choices as opposed to larger economic forces, such as falling oil prices.

Under the leadership of Republican Governor Sam Brownback, the state radically cut income taxes on corporations and individuals. Going on the assumption that this would generate a burst of economic growth and higher tax revenue, no alternative sources of revenue were put into place. Similarly, the state failed to lower spending.

Alas, reality trumps theory. As we have seen almost every time this thesis has been put into practice, it fails. The tax cuts don't magically kick the economy into higher gear and the government ends up short of money. Remember former President George W. Bush and his tax cuts? Same deal.

Much of the intellectual heft for this theory can be traced to economist Arthur Laffer, a former member of President Ronald Reagan’s Economic Policy Advisory Board who is sometimes referred to as the father of supply-side economics. To cite just one example: Laffer, along with Stephen Moore, expounded on this thesis in a September 2012 report, "Taxes Really Do Matter: Look at the States."

Now it is true that excessively high tax rates can cause economic harm. For those of you old enough to remember, think about when the Rolling Stones decamped from the U.K. to France in response to Britain’s 98 percent wealth tax; more recently the band U2 shielded some of its assets by shifting them from Ireland to the Netherlands.

The argument goes that cutting tax rates would have led these big earners to stay, and that capturing a reduced amount of revenue is better than losing the potential revenue completely.

Nor is anything wrong with the underlying premise of supply-side economics per se: We can increase economic growth by lowering barriers for producers to supply goods and services and make capital investments. A greater supply of goods and services at lower prices benefits all consumers, helping to expand business activity, hiring and spending. All of that naturally leads to higher tax revenue for the government.

And yet some economic radicals have taken the supply-side theory to absurd places. Perhaps the most radical is Grover Norquist, the promoter of the "Taxpayer Protection Pledge.” Norquist opposes any and all increases in taxes, and has persuaded many politicians and almost all Republicans to sign the pledge.

While serving as Kansas’s U.S senator, Brownback signed the pledge, and was a central player behind putting the theory into practice in the state. Unfortunately for Kansas, the real world has a tendency of introducing frictions that theory often ignores. Kansas now is confronting annual budget deficits, severe cuts in education and road maintenance, and credit-rating downgrades.

Ideally, states should be looking for the optimal point where tax rates produce the greatest revenue with the lowest burden. The range includes value choices between somewhat more revenue versus somewhat lower taxes.

Now, after Brownback's supply-side experiment, Kansas has become a sort of mirror image of the high-tax nation that the wealthy like Mick Jagger and U2 tend to flee. Those in the middle class in Kansas might like to leave for a state with services that aren't starved for money. But like many people of modest means, they aren't especially mobile, and often have deep roots in a community: They own homes, have family and friends nearby and have children in the local school system. Picking up and moving a small business or residence to the next state is harder than it sounds.

The bottom line: The results from the economic laboratory known as Kansas are in. Supply side theory -- and Kansans -- lost. The only question is whether those like Brownback have learned anything.

TOPEKA, KAN.
Kansas must fill a $400 million hole in its next budget after officials cut projections for tax collections from now through June 2016, a top adviser to Republican Gov. Sam Brownback said Monday.

Budget Director Shawn Sullivan said the governor plans to outline proposals this week for the GOP-dominated Legislature that would trim up to $90 million in spending during the fiscal year that begins July 1. Sullivan said much of the savings would come from lower-than-expected social services costs, and the governor expects to spare public schools and higher education.

But the remaining gap still would be far larger than the $150 million in general tax increases that Republican legislators anticipated needing to balance the budget.

The state's budget problems arose after Brownback successfully pushed lawmakers to cut personal income taxes in 2012 and 2013 in an effort to stimulate the economy. The governor wants to preserve those cuts as much as possible.


"We will work with the Legislature to structurally balance the budget and hopefully continue the trend toward lower income taxes," Sullivan said during a news conference announcing the forecast.

The new outlook issued Monday reduces projected tax collections by a total of $187 million for the current and next fiscal years. It revised a forecast made in November, which itself was more pessimistic than one from April 2014.

The forecasters reduced the estimate for total tax collections for the current fiscal year by nearly $88 million, or 1.5 percent, to about $5.7 billion. They also cut the tax estimate for the next fiscal year by nearly $100 million, or 1.7 percent, also making it almost $5.9 billion.

The new forecast also reduced the official projection for total tax collections in the fiscal year beginning in July 2016 by $88 million, or about 1.4 percent, making it about $6 billion.

Raney Gilliland, the director of the Kansas Legislative Research Department, said the latest forecast reflects a state economy that is growing, but not as much as the national economy. Most of the reductions in projected tax collections were in corporate income taxes, sales taxes and oil and natural gas severance taxes.

Sullivan said the gap between the state and national economies would be greater without the income tax cuts championed by Brownback.

But Democratic leaders said the latest forecast shows that Brownback's tax policies are a failure.

"We cannot afford to stay the course any longer," House Minority Leader Tom Burroughs, a Kansas City Democrat, said in a statement.

Brownback has proposed raising alcohol and tobacco taxes to balance the budget and has said he's open to boosting the state's sales tax.

The state had projected its budget shortfall for the next fiscal year at about $600 million, but GOP lawmakers were confident that they'd drafted proposals would erase three-quarters of it before the new fiscal forecast. Legislators are taking their annual spring break and plan to reconvene April 29 to wrap up the year's business.

"We are going to look at all revenue options and pursue the fairest and least harmful route," House Taxation Committee Chairman Marvin Kleeb, an Overland Park Republican, said in a statement.

Jeff Glendening, Kansas director for the small-government, anti-tax group Americans for Prosperity, influential among GOP conservatives, called for spending cuts.

"Raising taxes is not the answer," he said in a statement.

Read more here: http://www.miamiherald.com/news/politics-government/article19091628.html#storylink=cpy