More About Michael Leachman

Michael Leachman

Michael Leachman joined the Center in July 2009. He is the Director of State Fiscal Research with the State Fiscal Project.

Full bio and recent public appearances | Research archive at CBPP.org


5 Reasons Other States Shouldn’t Follow Kansas’ Tax-Cutting Lead

March 27, 2014 at 3:11 pm

One of the largest tax cuts any state has ever enacted took effect in Kansas at the beginning of last year.  The state sharply reduced its income tax rates and fully exempted certain business profits from taxation.  It also adopted a plan to cut income tax rates even further over the next few years.

Now, in a number of other states, proponents of tax cuts are saying that Kansas’ approach is a model for how to grow a state’s economy.  As we explain in our new paper, Kansas is anything but.  In fact, it’s a cautionary tale for five major reasons.

  1. Deep income tax cuts caused large revenue losses.  Kansas’ tax cuts this year are costing the state about 8 percent of the revenue it uses to fund schools, health care, and other public services, a hit comparable to a mid-sized recession.  State data show that the revenue loss will rise to 16 percent in five years if the state does not reverse the tax cuts.
  2. The revenue losses extended and deepened the recession’s damage to schools and other state services.  Most states are restoring funding for schools after years of significant cuts, but in Kansas the cuts continue (see chart).  Governor Sam Brownback recently proposed another reduction in per-pupil general school aid for next year, which would leave funding 17 percent below pre-recession levels.  Funding for other services — colleges and universities, libraries, and local health departments, among others — also is way down, and falling.
     
  3. The tax cuts delivered lopsided benefits to the wealthy.  Kansas’ tax cuts didn’t benefit everyone.  Most of the benefits went to high-income households.  Kansas even raised taxes for low-income families to offset part of the revenue loss; otherwise the cuts to schools and other services would have been greater still.
  4. Kansas’ tax cuts haven’t boosted its economy.  Since the tax cuts took effect at the beginning of 2013, Kansas has added jobs at a pace modestly slower than the country as a whole.  Average earnings fell more in Kansas in the year after the tax cut than in the rest of the country over the same period, while non-farm personal incomes rose less in Kansas than the nation as a whole. And so far there’s no evidence that Kansas is enjoying exceptional business growth: the number of registered businesses grew more slowly last year than in 2012, and the state’s share of all U.S. business establishments fell over the first three quarters of last year, which is the latest data available.
  5. There’s little evidence to suggest that Kansas’ tax cuts will improve its economy in the future.  No one knows for certain how Kansas’ economy will perform in the years ahead, but it isn’t likely to stand out from other states.  The latest official state revenue forecast, from November 2013, projects Kansas personal income will grow more slowly than total national personal income in 2014 and 2015.

Kansas’ tax cuts have meant big revenue losses and continued cuts in schools, colleges, and other services, with no noticeable economic gains.  That’s not a recipe that other states should want to follow.

Click here to read the full paper.

Caution Is the Right Approach to State “Surpluses”

January 22, 2014 at 9:55 am

Wisconsin’s Governor Scott Walker and New York’s Governor Andrew Cuomo, as well as leading lawmakers in Michigan and elsewhere, are using their state’s budget “surplus” to justify new tax cuts.  That’s highly imprudent, if not irresponsible.

State budget surpluses typically appear when the economy emerges from recession.  After a few years of weaker-than-expected revenues, states wisely tend to estimate revenue cautiously for the coming year.  If their estimates prove too cautious — for example, because the stock market does better than expected, raising people’s incomes and thus their tax payments — that produces a “surplus.”

Some governors and legislators love these surpluses because they seem like free money that policymakers can use as they please — like spend on tax cuts.  But that approach ignores three key facts:

First, a surplus means the state has more money than it expected, not necessarily more money than it needs.  Having experienced the worst recession since the Great Depression, states’ needs remain high.

Most states — including Michigan, New York, and Wisconsin — provide less general support for their schools per student than they did when the recession hit, often far less. Wisconsin has cut school funding especially deeply (by 15 percent), making Governor Walker’s call for tax cuts particularly rash (see graph).

Second, recovery from the Great Recession remains fragile, as December’s unexpectedly weak jobs report showed.  And who knows how the stock market will perform in 2014? After growing by 20 percent over the last year, it could take a tumble.  If the economy slows and the stock market slips, states surpluses will disappear.

Third, tax cuts are a lousy way to grow a state’s economy.  They do little or nothing to create jobs, and money spent on tax cuts can’t be used to improve schools, strengthen early education, repair infrastructure, or make other proven investments in a state’s economic future.

Other states with surpluses are taking a more responsible approach.  California’s Governor Jerry Brown, for example, is calling for putting much of the money into paying off state debt and building up reserves.  This approach still leaves many state needs unaddressed, but it’s wiser than the approach that policymakers in Wisconsin, New York, and Michigan are considering.

Unhappy New Year: North Carolina Eliminates Its EITC

January 13, 2014 at 2:15 pm

Low-wage working families have less support in North Carolina as of January 1.  That’s when the state officially eliminated its earned income tax credit (EITC), giving North Carolina the dubious distinction of being the only state ever to do so.

Half the states have created EITCs (see map) to help working families with incomes up to roughly $50,000 make ends meet.  As our recently updated backgrounder explains, these credits build on the benefits of the federal EITC and are easy to administer, with nearly every dollar spent on state credits going directly to the working families they were created to help.  They not only help families working for low wages meet basic needs but also reduce poverty, especially among children.  And the benefits can be long-lasting:  low-income children in families that get additional income through programs like the EITC do better and go farther in school and, as a result, work more and earn more as adults.

North Carolina’s decision to end its EITC will mean a tax hike for 900,000 working households, most of them with children to support.  The state’s policymakers had already cut the credit for 2013, its last year on the books, from 5 percent of the federal credit to 4.5 percent, shrinking an already modest benefit.

North Carolina has made other tax and spending decisions lately that harm Tarheel families.  The state raised sales taxes to partly fund deep income tax cuts for the wealthy, and it cut funding for schools and other state services.  And North Carolina slashed unemployment benefits more deeply than any other state.

These actions not only harm individual families, they harm local businesses and slow the economy by taking dollars away from the consumers who are most likely to spend them on local goods and services.

Three Steps to Estimating the Cost of a State EITC

December 19, 2013 at 3:49 pm

Half of the states and the District of Columbia have enacted earned income tax credits (EITCs) to supplement the federal EITC, the nation’s most effective tool for reducing poverty among working families and children.  The federal EITC lifted 6.5 million people — half of them children — out of poverty in 2012, and it has lasting benefits for low-income children, helping them do better (and go further) in school and improving their earnings as adults.

State EITCs combat poverty further by reducing state and local taxes for low-income people and helping families keep working despite low wages.  Like the federal EITC, a state EITC allows working families to keep more of what they earn and helps them meet basic needs.

Policymakers considering whether to create a state-level EITC can estimate its budget cost using a simple three-step process, as we explain in our updated paper:

Step 1:  Estimate the total value of federal EITC claims in a given state for a future fiscal year.  First, use IRS data to determine the value of EITC claims in a given state as a share of all U.S. EITC claims.  Then, apply that percentage to the congressional Joint Committee on Taxation’s projected total cost of the federal EITC for the future year in question. 

Step 2:  Multiply the expected value of the state’s federal EITC claims by the percentage at which the state credit will be set.  Most states’ EITCs provide benefits as a set percentage of the federal credit.  So, to estimate the cost of a state EITC, perform the calculation of Step 2.  That will estimate the cost of the state credit in a given fiscal year if everyone who received the federal credit also received the state credit.

Step 3:  Adjust the estimate for the fact that not all federal EITC claimants will claim the state credit.  In practice, a substantial portion of those who receive the federal EITC do not claim state EITCs.  Especially in the first few years, the cost of a refundable state EITC will likely be lower than the full cost of the federal credit multiplied by the state percentage.  To account for this, reduce the cost estimate by at least 10 percent.

We’ve estimated the costs to states of implementing a refundable EITC in fiscal year 2015 for tax year 2014 set at 5, 10, or 20 percent of the federal credit; other percentages may be calculated based on those numbers.

Click here to read the full paper.

For Some States, Education Cuts and Tax Cuts Go Hand in Hand

November 11, 2013 at 3:09 pm

Not only have many states imposed deep funding cuts for K-12 schools since the recession hit, as our recent report explained, but most of the states that cut the deepest also cut income tax rates, reducing revenue that might have gone to schools.

Five of the seven states that have cut general school aid per student by more than 15 percent since 2008 also cut personal or corporate income tax rates during this period (see chart):

  • Kansas slashed its personal income tax rates in 2012, with the top rate dropping from 6.45 to 4.9 percent, while cutting other taxes.  In 2013, the state cut its top rate again. All these tax cuts will cost an estimated $3.8 billion over the next five years.
  • Idaho cut its top personal income tax rate from 7.8 to 7.4 percent and its corporate income tax rate from 7.6 percent to 7.4 percent, reducing revenues this year by an estimated $35 million.
  • Oklahoma cut its top personal income tax rate from 5.5 to 5.25 percent, at a cost this year of $120 million.
  • Wisconsin cut personal income tax rates across the board at a cost of about $650 million over the next two years.
  • Arizona cut its corporate income tax rate, phased in over several years, to 4.9 percent from 6.98 percent.  This rate cut, along with other business tax cuts, cost the state about $38 million in 2012 and will cost a projected $538 million by 2018, when the cuts are fully implemented.

Not all the states that cut income tax rates also imposed big cuts in school funding.  (By the same token, two states that cut school funding by more than 15 percent — Alabama and South Carolina — didn’t cut broad income tax rates, though South Carolina did cut rates on business income at a cost of $20 million last year.)  But there’s no question that tax cuts leave less revenue for schools and make school cuts more likely.  Most serious studies find that state tax cuts produce little if any additional economic growth, let alone enough growth to offset fully the decline in state revenues.

Moreover, as the economy improves, states that cut school funding deeply will find it harder to restore that funding if they’ve permanently reduced their revenue by cutting income tax rates. And no state wants to face the future with underfunded schools.