Lessons about tax re­form from heart­land to Capi­tol Hill

States find low rates not enough to lure business

The Washington Times Weekly - - National - BY SALLY PER­SONS

As Pres­i­dent Trump and con­gres­sional Repub­li­cans pon­der big tax cuts to boost the U.S. econ­omy, Kansas has be­come a cau­tion­ary tale.

Prod­ded by Gov. Sam Brown­back, a Repub­li­can, Kansas em­barked on a ma­jor tax over­haul in 2012, re­duc­ing the top in­come tax rate from 6.45 per­cent to 4.9 per­cent and elim­i­nat­ing in­come tax on some busi­nesses al­to­gether.

Con­vinced they could turn the state into a heart­land mag­net for busi­nesses seek­ing to flee high-tax states on the coasts, Repub­li­can law­mak­ers in­stead punched a huge hole in their bud­get. Fac­ing mount­ing bills and shrink­ing rev­enue, the leg­is­la­ture last month de­fied Mr. Brown­back’s veto and moved to re­verse some of its cuts.

Whether the Kansas ex­per­i­ment is a ref­er­en­dum on con­ser­va­tive, low-tax poli­cies is an open ques­tion. Ob­ses­sion with tax rates of­ten ob­scures other fac­tors in busi­nesses’ de­ci­sion-mak­ing, such as the avail­abil­ity of a good work­force, qual­ity of life for em­ploy­ees, and prox­im­ity to air­ports and other in­fra­struc­ture, an­a­lysts say.

“You can’t just have the tax is­sue in iso­la­tion,” said Richard C. Aux­ier, a tax pol­icy re­searcher at the Ur­ban In­sti­tute. “There’s no clear link be­tween tax cuts and growth.”

With the next big round of gu­ber­na­to­rial elec­tions loom­ing next year, de­bates over com­pet­i­tive­ness and sup­ply-side tax pol­icy are likely to heat up.

At the na­tional level, the Trump ad­min­is­tra­tion is count­ing on a mas­sive tax rate cut to pay for it­self in the long run through ac­cel­er­ated economic growth. Mr. Brown­back’s of­fice is re­ject­ing com­plaints by lib­er­als and cen­trist Repub­li­cans in the Leg­is­la­ture that the tax cuts did not at­tract enough business to the state to pay for them­selves.

“In ef­forts to make Kansas the best state in Amer­ica to raise a fam­ily and grow a business, Gov. Brown­back cut in­come taxes for all work­ing Kansans and com­pletely lifted the in­come tax bur­den from small busi­nesses. It worked,” said com­mu­ni­ca­tions di­rec­tor Me­lika Wil­loughby. “Kansas set a record for new busi­nesses formed ev­ery year since the tax cuts, and the state’s un­em­ploy­ment rate is un­der 4 per­cent — the low­est it’s been in over 16 years.”

Kansas is hardly the only state fac­ing a bud­get im­passe. Deep-blue Illinois is strug­gling with its own tax-and-spend­ing prob­lems, in part a le­gacy of gen­er­ous pen­sion prom­ises to state work­ers that the state can­not meet.

But Mr. Brown­back’s crit­ics say over­all growth and job cre­ation lagged be­hind the na­tional av­er­age and even be­hind other Mid­west­ern states de­spite the tax cuts in 2012 and 2013.

At the same time, the state was fac­ing an es­ti­mated $900 mil­lion bud­get deficit over the next two years de­spite a se­ries of spend­ing cuts. The state Supreme Court or­dered the state gov­ern­ment to in­crease fund­ing for lag­ging pub­lic schools by $293 mil­lion over the next two years.

“It’s hard to cel­e­brate be­cause Kansas is in such sham­bles,” state Rep. Melissa Rooker, a Repub­li­can from Kansas City sub­urb of Fair­way, told The Wi­chita Ea­gle af­ter the June vote to over­ride Mr. Brown­back’s veto of tax hikes. “The mag­ni­tude of the prob­lems that we have to cor­rect is so great.”

Adam Michel, a tax pol­icy an­a­lyst at the con­ser­va­tive Her­itage Foun­da­tion, said Kansas’ prob­lem wasn’t the tax cut but how the state han­dled it. He said elim­i­nat­ing taxes for some cor­po­ra­tions cre­ated an in­cen­tive for busi­nesses to “rechar­ac­ter­ize” in­come, which cre­ated an un­sus­tain­able fi­nan­cial pic­ture.

“Their re­form wasn’t de­signed prop­erly,” Mr. Michel said.

Other com­men­ta­tors haven’t been so kind. Wil­liam G. Gale, an econ­o­mist and se­nior fel­low at the left-lean­ing Brook­ings In­sti­tu­tion, noted that Mr. Brown­back in 2012 promised that the tax cuts would rep­re­sent “a shot of adren­a­line in the heart of the Kansas econ­omy.”

Mr. Gale wrote in a blog post last month: “While the tax cut turned into a de­ba­cle, there is a po­ten­tial sil­ver lin­ing: three clear mes­sages for pol­i­cy­mak­ers on fed­eral tax re­form. First, tax cuts won’t boost growth. Sec­ond, spe­cial tax rates for busi­nesses will surely gen­er­ate tax shel­ter­ing and rev­enue losses, but will not pro­duce much new business ac­tiv­ity. And third, most im­por­tant, when Amer­i­cans see what their tax dol­lars buy, they choose higher rev­enues and more gov­ern­ment spend­ing over lower taxes and dra­co­nian pro­gram cuts.”

Tax cuts and business de­ci­sions

Done right, how­ever, tax cuts can draw busi­nesses to states, Mr. Michel ar­gued.

“We see in large, ag­gre­gate data that tax cuts would af­fect a com­pany’s de­ci­sion,” Mr. Michel said. “If you’re go­ing to build a fac­tory in a low-tax state ver­sus a high-tax state, you’re go­ing to pick the lower-tax state. It’s not al­ways the case that the com­pany leaves a high-tax state, but their next fac­tory or ven­ture, the lower tax rate will be a fac­tor.”

Gen­eral Elec­tric Co., the tech­nol­ogy con­glom­er­ate, faced such a choice.

GE of­fi­cials warned Con­necti­cut Gov. Dan Mal­loy in 2014 that the state’s business tax was al­ready high and the com­pany would con­sider mov­ing if it was raised.

Mr. Mal­loy, a Demo­crat, promised he wouldn’t raise the tax. Af­ter win­ning his re-elec­tion bid in 2014, he an­nounced $750 mil­lion in new business taxes. Mas­sachusetts law­mak­ers swept in to of­fer GE $25 mil­lion in prop­erty tax breaks and $120 mil­lion in grants to­ward pub­lic works.

GE broke ground on its new head­quar­ters in Bos­ton this year. Bos­ton of­fered more than tax re­lief, though.

GE Chair­man and CEO Jeff Im­melt cited the re­gion’s con­cen­tra­tion of high­qual­ity uni­ver­si­ties, Mas­sachusetts’ com­mit­ment to re­search and de­vel­op­ment, and the state’s tech-savvy work­force.

“Bos­ton was se­lected af­ter a care­ful evaluation of the business ecosys­tem, tal­ent, long-term costs, qual­ity of life for em­ploy­ees, con­nec­tions with the world and prox­im­ity to other im­por­tant com­pany as­sets,” Mr. Im­melt said in the press re­lease an­nounc­ing the move.

In a study of the move last year, Man­hat­tan In­sti­tute fel­low Aaron Renn said Bos­ton has the right com­bi­na­tion of work­force avail­abil­ity, ac­ces­si­bil­ity and growth po­ten­tial that draws com­pa­nies to the area. With the right in­cen­tives, in­clud­ing tax breaks, com­pa­nies can be en­ticed to move to such states.

It’s all about find­ing a mix that fits a com­pany, an­a­lysts said. Ari­zona and Florida have some of the low­est cor­po­rate tax rates in the nation, but they also have some of the low­est high school grad­u­a­tion rates in the coun­try.

Wis­con­sin might have higher grad­u­a­tion rates, but its pop­u­la­tion mi­gra­tion con­tin­ues to be net neg­a­tive — mean­ing more peo­ple are mov­ing out of than into the state.

Chris Ed­wards, an an­a­lyst at the lib­er­tar­ian Cato In­sti­tute warns that states can make only mar­ginal changes be­cause the fed­eral gov­ern­ment rep­re­sents such large parts of their economies.

“State gov­ern­ments fol­low the na­tional gov­ern­ment,” he said. “The fed­eral gov­ern­ment is so much big­ger and over­whelms what states can do.”

Amid global com­pe­ti­tion for busi­nesses, there is only so much one state can do to af­fect out­comes, an­a­lysts said, and tax pol­icy is just a small part of that.

“The fed­eral gov­ern­ment dom­i­nates ev­ery­thing states do,” Mr. Ed­wards said. “The fed­eral gov­ern­ment is so much big­ger and over­whelms what states can do.”

Mr. Aux­ier said the fed­eral gov­ern­ment pro­vides 30 per­cent of state spend­ing through pro­grams such as Med­i­caid and grants. Be­cause states can’t deficit spend like the fed­eral gov­ern­ment, they need to make tough choices if the fed­eral gov­ern­ment pulls back or if they want to cut state taxes.

As a re­sult, econ­o­mists say, the best state of­fi­cials can do is di­ver­sify their economies and not de­pend on tax cuts to fix their prob­lems.

“Fed­eral tax and bud­get pol­icy, and Fed­eral Re­serve pol­icy, have much to do with the econ­omy’s growth rate,” Mr. Fisher said. “And the best pre­dic­tor of state economic growth — a re­sult that I have found, and many oth­ers — is the mix of economic ac­tiv­ity in the state.”

“You can’t just have the tax is­sue in iso­la­tion. There’s no clear link be­tween tax cuts and growth.” — Richard C. Aux­ier, Ur­ban In­sti­tute

AS­SO­CI­ATED PRESS

Kansas Gov. Sam Brown­back re­jects com­plaints by lib­er­als and cen­trist Repub­li­cans in the state Leg­is­la­ture that tax cuts did not at­tract enough business to pay for them­selves.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.