Income Tax: Supply Side With a Cushion
WHY YOU SHOULD CARE
Some American politicians running for office this fall are promising to cut our taxes. Is that a good thing?
Death and taxes are life’s two certainties, it is said, but we’d add a third: politicians who promise tax cuts.
Tax policy, long a touchstone debate between conservatives and liberals, has taken on heightened importance as the tea party drives Republicans to fiscal extremes. These days, would-be governors from Wisconsin to Arizona have set their sights on the state income tax, arguing that reductions will spur the economy and bring their states more wealth. While campaign promises are a notoriously bad gauge of actual policymaking, rhetoric suggests that at least half a dozen states could tangle over income tax cuts next year.
In doing so, they’ll take care to avoid the fate of Kansas. The state is dealing with the fallout from deep tax cuts launched in 2012 and 2013 — including a $300 million budget shortfall this year. It’s still too early to judge whether the cuts might work, but in the meantime, the blowback has imperiled conservative Gov. Sam Brownback’s re-election in his normally red state. For other governors and gubernatorial hopefuls, Kansas has left a dilemma: how to cut taxes without suffering a Brownback blowback.
For other governors and gubernatorial hopefuls, Kansas has left a dilemma: how to cut taxes without suffering a Brownback blowback.
They’ve come up with an answer, of sorts. If state revenue doesn’t increase, as supply side predicts, then the cuts won’t happen. If state coffers grow, then they will cut taxes. And those cuts will be paid for, they predict, by the all the economic activity — new businesses, jobs and residents — the tax cuts unleash. In a way, the supply-siders are putting their money where their mouths are, both hedging their bets and offering the other side an olive branch.
“Revenue-triggered rate reductions are becoming more popular,” says Lyman Stone, an economist at the right-leaning Tax Foundation, who notes that North Carolina and West Virginia also recently embraced the approach.
Arkansas gubernatorial candidate Mike Ross’ proposal is a case in point. The Democrat and former congressman earlier this year unveiled a tax plan that would cut income taxes revenue by half a billion dollars, the Arkansas Times calculates. There would be across-the-board rate decreases, for the conservatives, and more progressiveness in rates, for the liberals. And for everyone, a safeguard: He’ll phase in the cuts as the state’s revenue grows, a process that could take any number of years. No revenue growth one year? Then the cuts would have to wait. “I will implement in a gradual, fiscally responsible way — as the state can afford it,” Ross promised.
In other states, leaders have embraced phased-in cuts and revenue triggers after promising ambitious, Kansas-like proposals — and then backed away. That’s what happened in Oklahoma, where Republican Gov. Mary Fallin originally proposed drastic tax cuts, including phasing out the state’s income tax altogether. The legislature resisted. The result: a 2014 tax cut that will be phased in after meeting certain revenue thresholds.
Fallin’s phase-in resulted partly from “being beat up for her plan, in part because we were already seeing in Oklahoma what happened in Kansas and learning major lessons from it,” says David Blatt, executive director of the left-leaning Oklahoma Policy Institute. Blatt says that basing cuts on revenue growth is a sort of “compromise mechanism” between fiscal conservatives intent on slashing taxes and centrists and progressives who want to maintain funding for education and other social services.
Ross warned in a Sept. 19 debate that cutting the state income tax would set Arkansas ‘on a path of fiscal irresponsibility and record deficits … .’
But it’s not clear the approach will please everyone. Elizabeth McNichol, an expert on state fiscal issues at the left-leaning Center on Budget and Policy Priorities, worries that revenue baselines won’t keep up with rising government costs. “Even if revenues are more this year than last year, there will be some inflation, more public school kids, potentially more old people,” she notes. “The things you’re spending money on are growing as well.”
Left and right have long tussled over taxes — the debate over the government’s right to tax income stretches all the way back to the Civil War, when the U.S. government levied a temporary income tax to help pay for the conflict. Congress tried to enact another income tax in 1894, but the Supreme Court struck it down. It took a constitutional amendment — the 16th — to authorize a federal income tax, in 1913. One by one, the states soon followed, and today only seven states don’t tax income at all. (Two don’t tax wage income.)
Criticism of those and other taxes began to rise in the 1970s and ’80s, when a group of influential conservatives developed arguments that high taxes hurt the economy. Arthur Laffer, a father of supply-side theory, has been behind many of the current state-based pushes to reduce or eliminate income taxes, including in Kansas.
But instead of standing as a model, Brownback’s experiment is used as a political cudgel. Arkansas’ Ross, for example, has invoked Kansas to bash his Republican opponent, Asa Hutchinson, who’s proposed cutting the state income tax by a full percentage point, with deeper cuts in the years ahead. Ross warned in a Sept. 19 debate that his foe’s plan would set Arkansas “on a path of fiscal irresponsibility and record deficits and having our credit rating lowered, just as they’ve seen in Kansas.”
But Stone, of the Tax Foundation, argues the impact from the Kansas imbroglio will only extend so far. “The fact of the matter is, every state is different” and “every tax plan is different.” Policy decisions, he says, “often have to do with personalities and local factors.”
That might be true in the long run. But for now, the Kansas effect is in full force.