The Center's work on 'Taxes' Issues


Kansas Isn’t the Only Tax-Cutting State With Budget Woes

January 16, 2015 at 3:08 pm

As we noted this morning, Kansas is the poster child for the harmful consequences of large state tax cuts, which can open up huge budget holes and undermine the foundations of a strong state economy, like a high-quality education system. But Kansas isn’t the only state experiencing pain of its own making.  Big tax cuts are playing a major role in several other states’ budget woes.  For example:

  • North Carolina followed Kansas’ lead and enacted large cuts to personal and corporate income taxes in 2013.  The cuts, which started taking effect last January, are already contributing to budget shortfalls; North Carolina faces a $200 million shortfall so far in the current budget year.   Some estimates put the 2016 cost of the tax cuts at $1.2 billion (about 8 percent of the budget).
  • Pennsylvania is $2 billion (nearly 7 percent) short of the revenue it needs this year to maintain services at current levels. This is an ongoing problem — revenues haven’t kept pace with needs in recent years — and tax cuts are a major reason. For example, the state has repeatedly cut a corporate tax called the capital stock and franchise tax. This tax, which raised more than $1 billion a year before the recession, will bring in an estimated $118 million in 2016 before disappearing altogether.
  • Wisconsin projects that revenues over the coming biennium will fall $2.2 billion (6.5 percent) short of agencies’ budget requests. This comes on the heels of several sets of tax cuts over the past four years that will cost over $1 billion this fiscal year, the state’s Legislative Fiscal Bureau estimates, and likely more than $2 billion in the next biennium.

Despite the steady improvement of the national economy, these states are trying to figure out how to plug budget holes.  Other states shouldn’t follow their example.

5 Pieces of Context for the New Kansas Budget

January 16, 2015 at 10:45 am

With Kansas Governor Sam Brownback releasing his budget this morning, it’s a good time for a refresher about what’s happened since Kansas enacted one of the largest state income tax cuts in history two years ago.

  1. Kansas’ finances are a mess. The tax cuts have proven even more expensive than originally imagined, leaving the state with far less revenue than it will need to pay for schools and other state services.  To get through the past two years, the governor has nearly drained Kansas’ operating reserves, leaving the state highly vulnerable to the next recession.
  2. Kansas’ schools and other services have been weakened and face even more cuts. General state aid for schools per student is 15 percent below pre-recession levels.  And with the state’s financial picture so bleak, more cuts are likely on the way, though a court ruling that the state’s school funding is so low it violates the state constitution may help.
  3. Taxes are down for the wealthy but up for the poor. 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 likely have been even bigger.
  4. The tax cuts haven’t boosted Kansas’ economy.  Since the tax cuts took effect two years ago, Kansas has seen private sector jobs grow by 2.6 percent, notably slower than the 4.4 percent growth nationally.
  5. There’s little evidence that the tax cuts will improve its economy in the future.  The latest official state revenue forecast, from last November, projects personal income will continue to grow more slowly in Kansas than in the nation as a whole this year, next year, and the year after that.  (See chart.)

State and Local Tax Systems Hit Lower-Income Families the Hardest

January 15, 2015 at 9:59 am

In nearly every state, low- and middle-income families pay a bigger share of their income in state and local taxes than wealthy families, a new report from the Institute on Taxation and Economic Policy (ITEP) finds.  As the New York Times’ Patricia Cohen wrote, “When it comes to the taxes closest to home, the less you earn, the harder you’re hit.”

Only California taxes the top 1 percent of households at a higher effective rate (8.7 percent) than middle-income taxpayers (8.2 percent), ITEP found.  In the ten states with the most regressive tax systems, the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy neighbors.

Washington State’s tax system is the most regressive, according to ITEP.  The bottom 20 percent of taxpayers pay 16.8 percent of their income in taxes, while the top 1 percent pay just 2.4 percent.  After Washington, the most regressive state and local tax systems are in Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Ari­zona, Kansas, and Indiana.

A number of states, including Kansas, North Carolina, and Ohio, have made the situation worse in recent years by cutting income taxes, the only major state revenue source typically based on ability to pay.  Income tax cuts thus tend to push more of the cost of paying for schools and other public services to the middle class and poor — exactly the opposite of what is needed.

Improving State Budget Policies

December 4, 2014 at 2:26 pm

States’ choices about investing in schools, health care, child care, and other services can either help create opportunity and prosperity for people or hold them back.  This short video explains how the State Priorities Partnership, a national network of 41 independent state policy organizations, works to:

  • strengthen policies that affect low- and moderate-income families, such as health care, economic security, education, and child care;
  • make state tax systems fairer and more effective in raising needed resources; and
  • help other nonprofits and the general public participate in debates about budget priorities.

Launched in 1993 in 12 states, the network — which local and national foundations support — has grown steadily; its 41 states include four-fifths of the U.S. population.  CBPP coordinates the network.

More Bad News for Backers of Kansas Tax Cuts

November 21, 2014 at 10:42 am

The latest projections from Kansas’ nonpartisan Legislative Research Department bring more bad news for those who hoped Kansas’ massive tax cuts would generate an economic surge.

The department predicts that personal incomes will grow more slowly in Kansas than in the nation as a whole this year and will continue to lag behind the national rate in 2015, 2016, and 2017, by wide margins (see graph).

This isn’t what tax cut proponents predicted.  Governor Sam Brownback said they would be “a shot of adrenaline into the heart of the Kansas economy.”  The Heritage Foundation’s Stephen Moore, who helped design them, said the economic benefits would be “near immediate and permanent.”

Faced with the state’s unimpressive economic performance since the tax cuts took effect, proponents now claim they just need a little more time to work.  But the new forecast, combined with last week’s announcement that Kansas’ budget has fallen much further into the red than previously acknowledged (because of the tax cuts), casts further doubt on those claims.

This shouldn’t be a surprise.  History suggests that deep cuts in personal income taxes are a poor strategy for economic growth, and the serious academic literature typically finds little relationship between a state’s tax levels and its economic performance.  So there’s no reason to think that the tax cuts will cause Kansas’ economy to boom in the future.