The nation’s boldest experiment in tax cut policy was officially declared a failure last week.
It happened in Kansas, where a Republican legislature increased income taxes to repair the budget crisis caused by years of severe tax cuts spearheaded by conservative Gov. Sam Brownback. Progressives cheered the development and declared it a clear example of how tax cut policy can lead to economic ruin.
But that narrative isn’t true in North Carolina, where the state has a budget surplus after Republican tax cuts. Why did the Kansas experiment fail when North Carolina’s hasn’t – at least not yet? There are at least two reasons:
First, the Kansas tax cuts were severe and reckless. Unlike in North Carolina, Kansas lawmakers “balanced” their budget using gimmicks that relied on future growth projections, which should always set off alarms for voters. Kansas also notably exempted sole proprietorships, partnerships and other so-called “pass-through” businesses from taxes. That policy, which N.C. lawmakers have smartly avoided, blew a hole in the Kansas budget, in part because many businesses rushed to re-classify themselves as pass-throughs to avoid taxes.
Reason No. 2: North Carolina’s tax cuts were immediately accompanied by significant spending cuts. That’s not necessarily a good thing. For example: In education spending, which makes up about one in every five dollars state and local governments spend, North Carolina is ranked near the bottom of the country in spending per capita. Kansas, until recently, was in the top half of U.S. states in education spending, which it initially tried to preserve.
In fact, the tax-cut experiment fell apart politically in Kansas because voters rebelled against the prospect of more spending cuts in education and elsewhere. Kansans also rebelled because the tax cuts weren’t working. The state’s economy lagged behind its neighbors and much of the country in growth as measured by real GDP. Expected tax revenue never arrived, which meant citizens were getting all the pain of budget cuts with few corresponding benefits, other than slightly lower taxes.
Meanwhile, North Carolina has a budget surplus, but one that’s potentially misleading. Unlike Kansas, our state has experienced modest economic growth, yet recent GDP data show we’re not growing as fast as most of our neighbors. That’s a signal that Republican tax cuts aren’t having much of an impact here.
That’s no economic fluke. History has shown, and studies have affirmed, that there’s little to no correlation between business tax cuts and sustained economic growth. Why? Businesses don’t create more jobs just because they’ve been given more money. They hire people when they need to hire – when customers come in the door or orders arrive for more products.
But now, N.C. lawmakers are considering more tax cuts as they put together the state budget this week. After all, Republicans say, we have a surplus. It’s working.
But those cuts have come at a cost. Program cuts and weak education spending are hurting our state, with too little growth to show for it all. No, we’re not Kansas, but our experiment isn’t working either. Republicans shouldn’t make it worse.