Conservative Kansas lawmakers voted to override their governor and increase personal income taxes and taxes on businesses. The Republican-dominated legislature reversed much of Governor Brownback’s infamous tax cut reform package after outrage over how the state couldn’t afford to do things like keep schools open full time. States like North Carolina are following close behind Kansas, and are starting to show the same signs of revenue shortages and economic stagnation. These states have some important things in common: they cut taxes for upper-income earners, reduced spending on education, and have no positive economic benefits to show for it. These are important lessons for Arkansas as our Tax Reform and Relief Task Force discusses major changes to our tax code.
Early critics of Kansas Governor Brownback’s experimental tax cut plan that began in 2012 are feeling a dose of vindication. That is because the original Kansas tax cuts were passed despite strong evidence that they wouldn’t work to help the economy. Most studies on the subject over the past 15 years show that personal income tax cuts don’t cause economic growth. What they tend to do instead is shift state costs to people who work at low-paying jobs and decrease funding for services that those same families rely on. That might sound familiar if you have heard talk around Arkansas about getting rid of the income tax and increasing revenue from sales taxes. That’s a tax shift, and it hurts people who earn the least.
That is also what is happening in North Carolina. Income tax cuts in the Tar Heel State have not provided economic benefits, and are threatening future budgets. The structure of the tax changes were not exactly the same as in Kansas. Kansas, for example, included a tax break for “pass through” organizations, which led to millions in additional unanticipated revenue losses on top of income tax cuts and other tax changes. While no states are passing exact carbon copies of tax code changes, Kansas and North Carolina have distinct similarities where it counts:
- The tax cuts are costing their budgets billions. NC would have $2.8 billion more in general revenue without the tax changes made since 2013. Kansas is facing a $1.1 billion budget gap through the end of fiscal year 2019.
- Their low-wage workers are being left behind. In North Carolina, more than 80 percent of the tax cuts since 2013 have benefited the top 20 percent of earners in the state. In Kansas, taxes actually went up for the lowest 20 percent of earners (by about $200 a year), while the top 1 percent saw an annual tax break of about $25,000.
- These changes are hurting investments in education. North Carolina’s K-12 school funding is still behind pre-recession levels after adjusting for inflation, their college tuition is up 42 percent following state cuts, and their schools are having a class size crisis. Kansas school districts were forced to end the school year early due to budget cuts.
- Working families are not better off. Kansas was rewarded with lagging employment and the state’s bond rating was downgraded twice because of budget problems. In 2016, three years after the North Carolina tax cuts, employment and wages were both below average. Numbers for 2017 show that North Carolina is still struggling with growth, with higher-than-average unemployment rates and slowing job growth.
Kansas and North Carolina aren’t the only ones. Indiana tried it too with a personal income tax cut in 2013 – which will be fully phased in in 2017 – the same year they are facing a $378 million revenue shortfall. We can also look to Maine, Ohio, Louisiana, Oklahoma, Wisconsin and more for stories of tax cut flops.
States that make major personal income tax cuts simply have a terrible track record of following that up with impressive economic growth. Instead, many of them face a budget crisis and turn to working families to make up the difference. Arkansas is no exception. We have had millions in tax cuts over the past several sessions and our revenue growth is hurting. When states give tax breaks to wealthy in exchange for job growth, they don’t get what they pay for. Arkansas legislators should learn from other states, or face buyer’s remorse.