States Reaping Consequences of Tax Decisions

In Minnesota, which raised income taxes on wealthy residents two years ago, revenues are surging beyond expectations, according to the state’s latest forecast.  In contrast, Kansas, Wisconsin, and North Carolina — which cut income taxes in recent years — face serious fiscal problems, despite the promises of tax-cut supporters.

Minnesota’s Governor Mark Dayton secured a package of tax measures that included a new, higher income tax bracket for high-income households (over $250,000 for a married couple), with the revenues going to expand access to full-day kindergarten and make preschool and college more affordable.  Opponents’ prediction that wealthy residents would flee the state in droves hasn’t materialized, and revenue growth has been stronger than expected.

As a result, Minnesota lawmakers this year are in the happy position of deciding what to do with the unexpected funds.  Governor Dayton and some lawmakers want, among other things, to greatly improve child care support for working families.  By helping many parents continue working, this would boost their long-term prospects and thereby benefit the state as a whole.

Kansas’ massive income tax cuts took effect the same day as Minnesota’s tax increase, but the legislative debate there is far from happy.  Governor Sam Brownback and lawmakers are debating where to cut spending further in order to escape the fiscal crisis that the tax cuts helped create.

Already, Governor Brownback has imposed a new round of school funding cuts for this fiscal year.  Revenues have come in lower than expected since the tax changes were enacted.  To help finance the tax cuts, the state has spent down its only operating reserves, leaving it very vulnerable to the next recession.  And bond rating agencies, disturbed by the fiscal mess, have lowered the state’s bond rating.

Similar news is emerging from Wisconsin and North Carolina, which also tried big tax cuts to expand their economies.  Both states face major budget shortfalls for the coming fiscal year, which may mean more cuts to schools and other services already badly damaged by the recession.

In these tax-cutting states, policymakers are facing the consequences of tax cuts that so far have failed to produce the promised economic surge.  Minnesota, too, is living with the consequences of its actions, but those are much more pleasant — and more promising for the state’s future.