It’s budget season. At the federal level, Congress will soon consider the President’s proposed 2018 budget. And many states are up against a June 30th deadline: the end of Fiscal Year 2017 and the deadline for approving a new budget. Yesterday’s post examined the catastrophic programmatic implications of President Trump’s federal budget proposal. Today the focus will be a little different— taxing policy at the state, not the federal level, and the tax slashing that continues to underpin much budgeting in 2017. Please continue reading; I promise this post will not be overly technical.
Much of the talk about state taxing policy these days relates to what just happened in Kansas. Both houses of the Kansas Legislature had voted to overturn several years of Governor Sam Brownback’s tax cutting and at the same time to eliminate a special taxing innovation that reduced business taxes on pass-through income. Governor Brownback, whose dedication to tax cutting is undeterred, vetoed the Legislature’s big tax increase. But two weeks ago, the Legislature—both houses dominated by Republicans—overrode Governor Brownback’s veto. Since Gov. Brownback initiated his experiment with tax cutting, Kansas has fallen into a fiscal crisis, and its public schools had suffered from lack of funding. Earlier this spring, the state’s supreme court had presented an ultimatum to the Legislature: improve school funding by June 30, or school will not open in September.
Brownback has called his tax cuts a real life experiment in supply-side economics. His hypothesis? That the state’s economy would thrive because everybody would be drawn to low-tax-Kansas to open businesses. Explosive economic growth, he predicted, would follow the tax cuts. Here is Michael Tomasky, writing for the NY Times about how the experiment turned out: “Kansas, under Gov. Sam Brownback, has come as close as we’ve ever gotten in the United States to conducting a perfect experiment in supply-side economics. The conservative governor, working with a conservative State Legislature, in the home state of the conservative Koch brothers, took office in 2011 vowing sharp cuts in taxes and state spending…. The taxes were cut, and by a lot. The cumulative cut was forecast to be $3.9 billion by 2019… The cuts came. But the growth never did… The experiment has been a disaster… Finally, even the Republican Kansas Legislature faced reality.”
Tomasky traces some of this back to Grover Norquist: “Republicans are not supposed to raise taxes, ever. In Washington or in the states. This goes back to President George H.W. Bush’s agreeing to a bipartisan tax increase in 1990 after famously saying in his 1988 campaign, ‘Read my lips: no new taxes.’ Afterward, the conservative group Americans for Tax Reform, led by Grover Norquist, started making Republican candidates for Congress and state houses sign a no-tax pledge. Ever since, with scattered exceptions, no Republican member of the House or Senate has voted for a tax increase. For 27 years. If you wonder why problems arise and Congress never does anything about them, the tax pledge is usually the answer, or at least an answer.”
Paul Krugman, the economist and NY Times columnist, calls supply-side tax slashing a “zombie” policy idea: “(T)he term refers to policy ideas that should have been abandoned long ago in the face of evidence and experience, but just keep shambling along. The right’s zombie-in-chief is the insistence that low taxes on the rich are the key to prosperity. This doctrine should have died when Bill Clinton’s tax hike failed to cause the predicted recession and was followed instead by an economic boom. It should have died again when George W. Bush’s tax cuts were followed by lackluster growth, then a crash. And it should have died yet again in the aftermath of the 2013 Obama tax hike—partly expiration of some Bush tax cuts, partly new taxes to pay for Obamacare—when the economy continued jogging along, adding 200,000 jobs a month. Despite the consistent wrongness of their predictions, however, tax-cut fanatics just kept gaining influence in the G.O.P.—until the disaster in Kansas, where Gov. Sam Brownback promised that deep tax cuts would yield an economic miracle. What the state got instead was weak growth and a fiscal crisis, finally pushing even Republicans to vote for tax hikes, overruling Brownback’s veto.”
Robert Greenstein, president of the Center on Budget and Policy Priorities, looks at the Kansas story as an important cautionary tale; he remains hopeful but skeptical that legislators in other states and Republicans in Congress will learn the story’s lesson. He spoke about what just happened in Kansas in his speech last week to the Cleveland City Club, where he pointed out that the Kansas lesson should be taken to heart in Ohio, where Governor John Kasich and Ohio’s all-Republican legislature have been running exactly the same experiment as Brownback’s in Kansas, and with similar results: “The Kansas tax cuts represent an important cautionary tale from which both state and federal policymakers should learn. And there are few states where these lessons are more applicable and important than Ohio. Your state has actually cut its top income tax rate even more deeply than Kansas did. Kansas cut its rate 29% since 2012. Ohio has cut its top rate one-third since 2005, from a top rate of 7.5% to just under 5%. Moreover, one of Kansas’ most damaging tax cuts was eliminating state income tax on what is known as ‘pass-through income’…. Ohio enacted a similar provision—eliminating state income tax on the first $250,000 a year of pass-through income and taxing the rest at just 3%. As in Kansas, the Ohio tax cuts have not delivered the promised results…”
Zach Schiller of Policy Matters Ohio just reported on the fiscal impact of Ohio’s tax cut on pass-through income, “A tax break on business income first enacted in 2013 is now costing Ohio about $1 billion a year. That’s far more than previous public estimates, which didn’t attempt to account for the full value of the break.”
How is all this cautionary history directly relevant in a blog whose primary subject is public education? Brent Larkin, the retired editorial page director of the Cleveland Plain Dealer, makes the connection perfectly clear in his column in last Sunday’s paper: “Hide the children. Ohio’s legislators need a scapegoat. And in this state, when the going gets tough, the kids get punished. Sometime between now and June 30, it’ll happen again… With tax revenues in a free fall, the Ohio General Assembly and Gov. John Kasich need to compensate for a multibillion-dollar mistake largely of their own making by inflicting pain on the people they’re supposed to serve, not betray. Like cornered rats, their way out will be to shortchange kids. So they’ll essentially flat-fund most school districts, while slashing support for others, ignoring yet again that ‘thorough and efficient’ system of schools requirement in Article VI of the Ohio Constitution.” And, “they will perpetuate Ohio’s ongoing pattern of shamefully underinvesting in preschool programs.” Larkin continues: “How is it a state that spent the past six years awash in tax revenue now lacks the money to make life-changing investments in a child’s future? The answer involves a misjudgment so egregious that if it happened in the private sector everyone involved would pay with their jobs. Six years ago, instead of balancing tax cuts with massive investments in the future, Kasich and his legislative conspirators began engineering what now total $5 billion in tax cuts.”
Here is Gordon Lafer—the labor, economics and state policy expert—explaining, in his new book, what he believes to be an even deeper motive of ALEC, Grover Norquist and the huge corporate lobbies who are driving Congress and the state legislatures to adhere zealously to tax-slashing: “The corporate lobbies have pursued an agenda that steadily shrinks public services, including education, health care, libraries, recreation, parks, and transportation. The agenda serves to lower corporate tax bills and creates new markets for those hoping to profit from the privatization of public services. But there are deeper rationales underlying the erosion of public services… At a deeper level, the elimination of basic services serves, over time, to lower popular expectations regarding the standard of living to which one is entitled. For the economic elite—the few seeking to extend their rule over the many—the central political question of this time is how to accelerate economic inequality without provoking a political backlash. A key component of the answer to this question appears to be an attempt to engineer what might be termed a revolution of falling expectations among the public.” (The One Percent Solution, pp. 75-76)