West Virginians, watch out! Arthur Laffer visited recently to give you advice about taxes and the West Virginia economy. He said that if your lawmakers would just get rid of state income taxes, especially for the wealthy, your state economy would prosper.
Laffer is a conservative economist who for years has traveled the nation trying to sell the idea that lowering upper income tax brackets leads to better economic conditions without hurting budgets.
Lower taxes and economic prosperity. Isn’t that a seductive combination? It sounds like everyone’s dream.
It sure sounded good four years ago in Kansas too, when we paid Mr. Laffer to visit. He told Kansas lawmakers a similar story — if you make big cuts in the income tax, your economy will grow, job creation will spike, and the resulting economic activity will still bring in enough revenue to fund the state budget.
Kansas bought it. Our lawmakers made dramatic cuts to state income tax rates and exempted most businesses from paying income tax at all. Our governor, echoing Laffer, announced that these actions would be like a “shot of adrenaline to the Kansas economy.”
What happened next? In the first full year that the tax cuts were implemented, state general fund revenue dropped a stunning $700 million (11 percent) from the year before, and then kept going down. Kansas no longer had enough income to pay normal expenses, so the state began using up its reserves. When the reserves were gone, lawmakers transferred money from the state highway fund and from just about any other fund that had available cash.
An excellent highway system and strong public schools have always been a key to economic health in Kansas, but a rapidly dropping revenue steam compromised funding for those areas. Transferring money from the highway fund to shore up the general fund came at the expense of road maintenance projects. Budget cuts to education lowered the amount of money going to Kansas classrooms and also forced up property taxes in local school districts.
This past spring, after lawmakers concluded that they had reduced expenses for education and other key state programs down to the lowest possible level, they still faced a huge imbalance between income and expense, but had no money in the bank to cover the gap. They had a full- blown budget crisis on their hands. The resulting record-long legislative session ended in June with even the most conservative legislators voting for the largest tax increase in Kansas history — mostly a hike in the sales tax.
A higher sales tax rate and more spending cuts temporarily quelled the crisis, but did not solve the problem.
Financially, Kansas now barely slides by, without reserves, and depending too heavily on borrowed money and one-time funds. Kansas is stuck, unable to make necessary investments in education and roads, while its neighbors move ahead. The state’s political energy was expended on a self-imposed budget crisis rather than looking forward to the future.
Mr. Laffer’s prescription threw the Kansas budget badly out of balance, but did it at least grow jobs and give the state an economic bounce? It did not.
Kansas lags its geographic region, and the nation as a whole, in economic growth. State gross product growth, private sector job growth, and private sector wage growth have all dropped behind our region’s average since 2012 when the tax plan was put in place.
In August, Kansas lost 3,000 jobs, and that’s after losing more than 5,000 in July. The promise of economic prosperity has simply not panned out.
So, West Virginia, go for the Laffer advice at your peril. In Kansas, following that advice has yielded a perpetual budget crisis and economic stagnation.
Duane Goossen is a former Kansas budget director who served from 1998 through 2010 under both Republican and Democratic governors.