The Center's work on 'Budgets' Issues


Setting the Record Straight on Kansas

April 24, 2014 at 2:05 pm

Rex Sinquefield — who funds campaigns for drastic tax cuts in Missouri — claims that our recent paper about the budgetary and economic impact of Kansas’ recent tax cuts was “patently false” and offers information that he says we “chose to ignore or distort.”

In his piece for Forbes, however, Sinquefield doesn’t back up his “patently false” claim by challenging any of the data we provide.  But three of the points of information he thinks we ignored are worth reviewing, because they are misleading, inaccurate, and often repeated by tax cut enthusiasts.

First, Sinquefield offers data that appear to show that states without personal income taxes outperformed states with relatively high income taxes between 2001 and 2011.  He doesn’t adjust for factors other than taxes that might account for these findings.  Instead, he simply asserts that taxes are the cause.  In fact, some of the no-income-tax states experienced relatively strong population growth over that period for reasons that have nothing to do with taxes (and much more to do with low housing prices, climate, and birth rates).  If one adjusts merely for population, by comparing how these states performed per capita, the relationship Sinquefield claims goes away.

Second, rather than challenge our point that per-pupil funding for Kansas schools continues to fall, Sinquefield asserts that there is “no proof that the quality of education improves with more spending” — as if Kansas, where general school aid per pupil is down 16 percent since 2008, can continue to cut school funding indefinitely with no consequences for students.  To the contrary, the evidence indicates that deep cuts in school spending harm student outcomes.

Third, Sinquefield points to a “dynamic” model of Kansas’ tax cuts that finds the tax cuts will boost jobs, business investment, and disposable income.  The model he cites is not well-known and has been disparaged by academic economists and others who have tried to understand its methodology.  It appears designed to predetermine its results by over-valuing the economic benefits of cutting taxes, and greatly under-valuing the economic costs of reducing state spending (laying off school workers and other public employees, discontinuing contracts with private sector vendors, and other actions that counteract the economic value of tax cuts).

Sinquefield is right about one thing:  we did ignore the information he offers, as should anyone who cares about a serious policy debate.

(A final note:  Sinquefield mentions that CBPP has received funding from George Soros.  CBPP is supported primarily by a wide range of foundation grants.  The full list of our supporting organizations can be found here.)

In Illinois, a Chance to Fix a Constitutional Flaw

April 23, 2014 at 1:04 pm

Illinois’ constitution has a requirement that is quite unusual among states:  the state must have a single-rate income tax, meaning that middle-income taxpayers pay income tax at the same rate as the state’s wealthiest.  This provision has been a fiscal and economic failure.  Now lawmakers are considering a fix that would benefit the state’s middle-income taxpayers and economy for the long term.

When Illinois enacted the single-rate rule in 1970, the income gap between the wealthy and everyone else nationwide had been falling for several decades.  Since the 1970s, however, the top 5 percent of Illinoisans’ incomes have risen 123 percent — six-and-a-half times the rate for middle-income households (see chart).

In other words, most of the income benefits of the state’s economic growth since 1970 have accrued to the wealthy, and Illinois today has the nation’s ninth-highest level of income inequality.

The single-rate income tax is bad enough for middle-income households.  Other major revenue options, like sales or property tax increases, are even tougher on low- and middle-income families.  Indeed, accounting for all forms of state and local taxation, the Institute on Taxation and Economic Policy reports that Illinois’ tax structure is the nation’s fourth most lopsided in favor of those with high incomes, with the top 1 percent of taxpayers (with average income of $1.5 million) paying less than half as much of their income in taxes than the 80 percent with incomes below $93,000.

In part because of its limited revenue options, Illinois for many years did not raise enough tax dollars to cover its costs.  The state accrued nearly $10 billion in unpaid bills to doctors, child care centers, and other service providers, and it fell far behind on its pension payments. A temporary income tax increase enacted in 2011 has helped the state to slash the backlog of unpaid bills, but the state’s fiscal challenges remain large.

Nor has the flat-rate requirement helped Illinois’ economy.  Unemployment in Illinois remains well above the national average, and much higher than neighbors like Minnesota and Missouri that have multi-rate taxes.  (In fact, Minnesota last year raised taxes on its highest-income residents, with no economic harm, contrary to opponents’ predictions.)  A plethora of academic studies, as well as states’ direct experience, show that personal income tax rates have essentially no relationship to economic growth.

In the coming days, Illinois’ legislature will consider whether to give voters the option of fixing the flawed single-rate mandate.  A proposed constitutional amendment would enable Illinois to impose different rates on different levels of income, an option that all but a handful of other states already have.  This change could allow the state to fully pay its backlog of bills; better fund schools, parks, and roads; or meet other needs without imposing the greatest burden on middle-income Illinoisans.

States’ Very Good Deal on Expanding Medicaid Gets Even Better

April 22, 2014 at 3:51 pm

In a little-noticed finding in last week’s Congressional Budget Office (CBO) report on health reform, CBO sharply lowered its estimates of how much the Medicaid expansion will cost states.  We’ve noted repeatedly that the federal government will cover the large bulk of the expansion’s cost.  As our new report explains, these new figures make it even clearer that the expansion is a great deal for states.

  • CBO now estimates that the federal government will, on average, pick up more than 95 percent of the total cost of the Medicaid expansion and other health reform-related costs in Medicaid and the Children’s Health Insurance Program (CHIP) over the next ten years (2015-2024).
  • States will spend only 1.6 percent more on Medicaid and CHIP due to health reform than they would have spent without health reform (see chart).  That’s about one-third less than CBO projected in February.

Moreover, the 1.6 percent figure doesn’t reflect states’ savings in providing health care for the uninsured, many of whom will now have Medicaid coverage.  The Urban Institute has estimated that if all states took the Medicaid expansion, states would save between $26 billion and $52 billion from 2014 through 2019 in reduced spending on hospital care and other services provided to the uninsured.

3 Steps States Can Take to Improve Their Rainy Day Funds Now

April 21, 2014 at 10:02 am

States can take concrete steps now to improve the structure of their rainy day funds, helping them to more effectively weather the impact of inevitable future downturns, as we explain in our new paper.

States used their rainy day funds to avert over $20 billion in cuts to services, tax increases, or both, in each of the last two recessions, highlighting the funds’ importance.  Yet these reserves filled only a modest share of states’ record-setting budget gaps; states would have weathered the storms better with bigger rainy day funds.

States shouldn’t make rapid replenishment of rainy day funds a priority until their revenues rise well above pre-recession levels, unemployment has declined further, and they have restored programs cut during the recession — and most states are not yet there.

But, when they are ready to replenish those funds, here are three steps they can take:

  1. Create a rainy day fund, if they don’t have one.  Four states — Colorado, Illinois, Kansas, and Montana — lack a designated rainy day fund.  The budgets of all of these states except Montana were hit hard by the economic downturn, and the lack of a rainy day fund left them more vulnerable to the recession’s effects.
  2. Loosen overly restrictive caps on the size of rainy day funds.  One reason rainy day funds weren’t even more effective in the most recent downturn is that 31 states and the District of Columbia cap them at inadequate levels, such as 10 percent of the budget or less.  States with overly restrictive caps could either remove the cap or raise it to a more adequate level, such as 15 percent of the budget.
  3. Ease rainy day fund rules that make it difficult to make deposits in good times.  Most states place a low priority on replenishing their funds, depositing only whatever surpluses are left over at the end of the year.  States could integrate rainy day fund transfers into the budget as part of an overall reserve policy that places a high priority on saving.

Click here to read the full paper.

States Are Starting to Save for Another Rainy Day

April 16, 2014 at 1:19 pm

With the budget challenges of the Great Recession and its aftermath still fresh in their minds, state policymakers are considering ways to strengthen their “rainy day funds” — budget reserves they can use when recessions or other unexpected events cause revenues to fall or spending to rise.  But, it’s still premature for most states to act aggressively to refill the funds until their revenues rise well above pre-recession levels, unemployment has declined further, and they have restored programs cut during the recession, as we explain in a new paper.

States used their rainy day funds to avert over $20 billion in cuts to services, tax increases, or both, in each of the last two recessions, highlighting the funds’ importance.  Since draining reserves to a low of 2.4 percent of spending in state fiscal year 2010, states have begun to refill them partly (see chart).

The decisions about when and how quickly to refill a rainy day fund will be different for each state.  Here are some questions that states should consider:

  • Have tax collections recovered from the recession?  One sign that a state has sufficient funds to begin refilling its rainy day fund is that both its annual tax collections and its annual growth in tax collections have returned to pre-recession levels, after accounting for inflation.  Fewer than half of the states have recovered to this extent.
  • Has the state’s economy recovered?  A return to pre-recession unemployment rates and personal income indicates that the state’s economy is on the mend.  Then the state can more likely meet the needs of its residents and also set funds aside for future downturns.  Most state economies have not yet fully recovered from the downturn.
  • How big is the rainy day fund?  Resuming fund deposits is a higher priority in states with little or no funds remaining.  These states may want to spread the replenishment over more years and should consider beginning sooner.  At the end of fiscal year 2013, 16 states had general fund reserves of less than 5 percent of the budget. 
  • What else might states do with available funds?  A rainy day fund’s ultimate goal is to help maintain state support for education, health care, transportation, and other services that promote economic growth and meet residents’ needs.  If depositing money in the fund would jeopardize a state’s ability to support these programs adequately — especially after years of funding cuts in an economic downturn — program funding should take priority. 
  • Is the state experiencing a revenue “windfall”?  Some states’ revenue collections are temporarily high as a result of a court settlement or other short-term reason.  For example, Connecticut received $175 million this year from a temporary tax amnesty program, and Louisiana is receiving payments from BP as a result of the 2010 oil spill.  States should use caution when deciding how to spend these temporary windfalls.  Shoring up a rainy day fund is a prudent use of one-time funds, while enacting ongoing program expansions or permanent tax cuts could contribute to future budget imbalances.

Click here to read the full paper.