Off the Charts Blog | Center on Budget and Policy Priorities

As states finalize their budgets for the next fiscal year, Minnesota stands out for making smart changes to its tax system that will position the state for future economic growth.  The legislature passed a tax plan last night that — after years of spending cuts — raises revenue to avoid more cuts and to make new investments that brighten the state’s economic future.  It also modernizes the state’s tax system so that it generates adequate revenue for a thriving state in a 21^st century economy.  Governor Mark Dayton supports the legislation and is expected to sign it.

The plan creates a new income tax bracket for the state’s richest households, repeals some tax breaks for companies operating outside the United States, raises revenues through changes to estate and gift taxes, and increases tobacco taxes.  It also helps modernize the state’s outdated sales tax system, including by taxing some digital goods and by requiring some online retailers to collect sales taxes on purchases by Minnesota residents.

The new revenue will prevent more than $600 million in cuts over the next two years to services such as schools, community colleges, natural resource protection, and programs that help seniors live independent lives.

The revenue also will enable the state to make substantial new investments in education.  For example, Minnesota will provide free full-day kindergarten in more public schools across the state, and it will substantially improve access to high-quality preschool for underprivileged children — an investment that research has proven boosts the incomes and productivity of children when they grow up.

Among other priorities, the plan also will allow the state to hold tuition steady in the state’s colleges and universities, and to increase financial aid for low- and middle-income families.  Over the last five years, Minnesota has cut funding for higher education by 30 percent, leading to substantial tuition hikes.

These investments in the state’s education system will pay off with stronger economic growth in the future by producing a better educated workforce with the kinds of skills and training that employers — especially high-wage employers — will need in the future.

The new revenue also will allow the state to reduce property taxes for many homeowners and many low- and moderate-income renters, who pay property taxes through their rent.  And, it will allow for more state aid to local governments, helping them further limit property taxes.  These substantial reductions in property taxes, combined with the income tax increase for wealthy residents, will make the state’s currently regressive state and local tax system fairer.

States that are still considering tax and spending changes — and how to boost their economies while supporting middle- and lower-income families — should look carefully at Minnesota’s plan.

In delivering the Republican Party’s weekly address on Saturday, Kansas Governor Sam Brownback made the rosy claim that states can cut taxes deeply without hurting their schools and other investments in the future, and he used his state as an example.  But the governor’s claim is too good to be true — and his own state proves it.

Governor Brownback claimed that he’s turned the state’s budget deficit into a surplus, even while passing the largest tax cut in Kansas history.  “To make that financial turnaround a reality,” the Governor claimed, “. . . we didn’t cut state funding to schools.  We didn’t cut state funding for our universities and colleges.”

In fact, state funding for general elementary and secondary education is lower, even in nominal terms, than when Brownback took office in 2011, and is down sharply — by 10 percent — after adjusting for enrollment growth and inflation.  Higher education funding is up slightly in nominal terms, but down 4 percent after adjusting for enrollment growth and inflation.

Further, Brownback’s claim ignores his decision to lock in education funding cuts enacted earlier in the recession, before he took office.  Since 2008, per-student K-12 education funding is down 14 percent after adjusting for inflation, and will be down 19 percent by 2015 if the Governor gets his way (see chart).  In addition, per-student higher education funding is already down 24.5 percent.

Funding for education in Kansas will likely continue to decline, thanks to the massive income tax cut that Governor Brownback signed last year.  That tax cut, which slashed taxes for the wealthy and profitable corporations while raising them for low-income seniors and families, drained $700 million from the resources available to fund education and other services.  The legislature’s research arm says that, starting in 2014 as a result of the tax cut, revenues will fall far short of what it would cost to maintain funding for schools and other state services at current levels ― levels that already reflect the aforementioned cuts in funding for K-12 schools and for higher education.

Despite proposing to raise other taxes to offset the impact of last year’s tax cut and help balance the budget, Governor Brownback proposes cutting per-student K-12 school funding by about another 5 percent by 2015, after adjusting for inflation.  He also has called for gradually eliminating income taxes altogether, without explaining how Kansas could afford to do so.

Citing the budgetary damage from the tax cuts, a state district court found in January that Kansas is unconstitutionally underfunding its elementary and secondary schools.

Contrary to his claims, Governor Brownback’s own experience shows that states can’t slash taxes without damaging funding for fundamental state services.  There’s no free lunch.

Today’s jobs report suggests that state and local public job losses may be leveling out, a more hopeful picture than last month.  States and localities gained a modest 7,000 jobs in March and have cut 28,000 jobs over the last 12 months, a much smaller amount than in recent one-year periods.  But states and localities will need much more than a few months of modest job gains to recover fully from the recession.

The country has 718,000 fewer state and local government employees than in August 2008, when employment peaked before the recession took hold (see graph).

This means fewer teachers, child abuse caseworkers, firefighters, and police officers ― at a time when needs remain high.  And the large-scale loss of public-sector jobs has slowed the nation’s recovery, just as private-sector job losses have.

Whether states and localities begin to recover depends in part on federal policymakers.  If they allow the “sequestration” budget cuts to remain in effect and even extend beyond this year, states and localities will lose federal funding for schools and other services, forcing more layoffs and service reductions.

And if policymakers impose even harsher cuts in funding for states and localities, as would occur under the House-passed Ryan budget, states and localities will lose even more jobs.

Federal support for services that states and localities provide — schools, health care, clean water, and law enforcement, for example — would fall precipitously under the House-passed budget from Budget Committee Chairman Paul Ryan, our new report explains.  These cuts would come on top of the deep cuts in federal funding for states and localities already scheduled under the 2011 Budget Control Act (BCA) and the automatic cuts known as sequestration that began to take effect this month.

• The Ryan budget would block-grant Medicaid and cut its funding by nearly one-third. The federal government would no longer pay a fixed share of states’ Medicaid costs; instead, states would get a fixed dollar amount that would fall further behind states’ needs with every passing year.  Federal funding would drop 31 percent by 2023, relative to current law.  These cuts would come in addition to the cuts from the Ryan budget’s repeal of health reform’s Medicaid expansion.
• The Ryan budget would cut funding for a range of other state and local services. It would cut non-defense discretionary (i.e. non-entitlement) funding — one-quarter of which goes to states and localities — by $256 billion over the ten years from 2014 through 2023.  That’s an average of 18 percent below the already tight BCA funding caps.  Our paper gives state-by-state estimates for the cuts in 2014 and 2014-2023 if they fall proportionally across this part of the budget.Policymakers could spare state and local funding and make all of the required cuts from purely federal areas of non-defense discretionary spending.  But that would entail extremely deep cuts in veterans’ health care, biomedical research, border protection, the FBI, the Social Security Administration, and the like.  Indeed, rather than spare state and local funding from cuts, policymakers likely would cut it by more than 18 percent in order to protect federal activities such as these.



• The cuts are much deeper than those under sequestration. The cuts to non-defense discretionary funding under the Ryan budget in 2014 would be nearly three times as deep as under sequestration.  The difference would be even larger in later years.
• The Ryan budget likely would push federal funding for state and local services far below historical levels. By 2023, discretionary state and local grants would fall to an estimated 0.7 percent of GDP, half the average of the last 35 years (see graph).

A number of states, including Arkansas, Kansas, Missouri, North Carolina, Ohio, and Wisconsin, are considering deep cuts in personal income taxes to spur economic growth. But both recent history and empirical studies suggest that this approach doesn’t work particularly well, as our new report explains.

First, let’s look at recent history.  Of the six states that cut income taxes sharply between 2000 2002* and 2007 (when the recession hit), three grew more slowly than the rest of the country in the years that followed.  The other three saw above-average growth, but they are major oil-producing states (Louisiana, New Mexico, and Oklahoma) that benefitted from a sharp rise in oil prices.

Similarly, the five states that enacted the deepest tax cuts during the boom years of the middle and late 1990s saw job growth over the next full economic cycle (2000-2007) of less than 0.3 percent per year, on average, compared to 1.0 percent for the other states (see graph).  They also had slower income growth than the rest of the nation on average.  (A sixth state, New Jersey, also cut taxes deeply during the 1990s, but we excluded it here because — unlike any of the other big tax-cutting states — it raised taxes by enough in the 2000s to offset fully the earlier tax cuts.)

As for empirical studies, eight major studies published in academic journals since 2000 have examined whether differences in state personal income tax levels affect states’ relative rates of economic growth.  Six found no significant effects, and one of the others produced internally inconsistent results.

Despite the evidence that cutting personal income taxes does little to boost state economies, states may still be tempted to take the risk.  That would be a mistake.

With their revenues still deeply damaged by the recession and their reserve funds depleted, states have little margin for error right now.  Gambling on a personal income tax cut would put fundamental public services, which in most states are heavily dependent on personal income tax revenue, at risk.  (Personal income taxes account for 24 percent of state general revenues, on average.)

And with the federal government on track to impose deep cuts in funding for schools and other services that states provide, states have even more reason to protect their own revenue in order to limit the damage to their public services.

*Correction, March 25: we changed 2000 to 2002 in the second paragraph.