The economic case for tax cuts is in shambles

When it comes to the role of taxes and public services in the economy, we too often engage in an ideological debate that changes no one’s mind. One side talks about the importance of investing in schools, roads, and public health and safety as a foundation for the economy. The other side argues that only the private sector creates new income (with the implication that money spent on teacher salaries, road maintenance, and health care is somehow taken out of the economy).

It’s hard to make any headway in such a strongly ideological debate, but we don’t have to consider just our ideologies of how we imagine the world to work. We can look at how it actually is working across the country. In these real-world experiments, the claims of tax cut boosters do not come out looking good.

The most obvious example is Oklahoma’s neighbor to the north. In 2012, the Kansas legislature and Governor Sam Brownback approved the largest tax cut in state history. The bill slashed the state’s top income tax rate from 6.45 percent to 4.9 percent, and it completely exempted from taxation the profits of sole proprietorship business owners. Tax cut advocates promised that the plan would produce “enormous prosperity” for the state, and Oklahoma’s anti-tax interest groups urged us to follow the Kansas model.

Nowadays, they are not so eager to talk about Kansas. Since the tax cuts took effect in 2013, job growth in the state has actually lagged behind the national average. Meanwhile, tax revenue has plummeted. For the first 11 months of budget year 2014, tax collections are down $685 million, or 12 percent, from the previous year. Governor Brownback attempted to shift the blame for the budget shortfall onto the Obama administration, but the analysts cited by Governor Brownback said he was misrepresenting their research. Moody’s Investors Service downgraded Kansas’s credit rating over concerns that the state would burn through its rainy day fund to make up for the revenue lost to tax cuts. Major cuts at the state level have forced local communities in Kansas to consider sales tax hikes to maintain services.

The stream of bad news has put Governor Brownback on the defensive. He’s gone from saying the tax cuts would be a “shot of adrenaline” for the Kansas economy to comparing the economy to a patient recovering after a surgery. Despite Kansas’ heavily Republican lean, pollsters say the governor’s race is a toss-up between Brownback and his Democratic challenger.

At the same time as Kansas was launching its tax cut experiment, another state offered a clear counter-example. At the beginning of 2013, California increased its top income tax rate to 13.3 percent on income more than $1 million, the highest rate in the nation. This year, in contrast to the budget shortfalls in tax-cutting states like Kansas and Oklahoma, California has a $4.2 billion surplus that the state is using to build a Rainy Day Fund and pay down its debt. At the same time, its economy is doing as well or better than low tax states and the nation as a whole.

Foes of the income tax like to argue that it discourages work. They say that “life is about incentives”, and the best incentive states can offer is low tax rates and minimal regulation. By this logic, workers and jobs will always flee to the lowest tax option.

If that were true, we would expect California, with its highest top income tax rate in the nation, to see far less job growth than Kansas, with its historic tax cuts. The opposite is true. Since the beginning of 2012, private-sector employment in California has increased 7.2 percent, beating the US as a whole (6.2 percent) and more than double the private-sector employment growth in Kansas (3.0 percent). Since tax changes went into effect in both states in 2013, employment grew 4.2 percent in California, 2.0 percent in Kansas, and 3.5 percent in the nation as a whole.

Of course that doesn’t mean increasing taxes is the sure strategy for economic growth. If we argued that, we would be guilty of the same oversimplification for political purposes that the anti-tax advocates have engaged in. Many more factors come into play — like climate, natural resources, trends in the state’s traditional industries, or just plain luck. What’s very clear from the data, however, is that low taxes don’t guarantee economic growth, and in fact they could seriously damage a state’s economic health.

As Oklahoma State Treasurer Ken Miller pointed out in the Wall Street Journal, “Sometimes ideological experiments bring unintended outcomes. I think Kansas is seeing that, and it serves as a reminder for the rest of us.”

Unfortunately, Oklahoma’s biggest tax cut boosters seem to be impervious to this reality. They are repeating the same old arguments to claim that eliminating the income tax is the best “recipe for economic growth.” Before we follow that recipe any further, we should look at the charred mess that’s come out of the oven a few miles north.