Kansas could have avoided its economic tornado by learning from New Mexico’s mistakes

2018-06-17T11:34:17+00:00 Blog Posts, Tax and Budget Blog|

by Bill Jordan
June 9, 2015

After Dorothy Gale is swept away to a magical land in The Wizard of Oz, she spends the rest of the iconic movie trying to get back to Kansas—the black-and-white Kansas of the Dust Bowl. One has to wonder, though, if she had been swept away from the Kansas of 2015 would she still be so keen to get back? While Kansas has recovered from the severe precipitation drought of the 1930s it is now in the grips of a very different kind of disaster—a dehydrated state budget that’s been drained of enough money to pay for vital services like education, public health, and first responders.

Kansas’ self-inflicted fiscal drought is due to extreme income tax cuts, which are bleeding the budget dry. The Kansas Legislature recently passed a $6.4 billion budget for the coming fiscal year—a budget, incidentally that’s not much bigger than New Mexico’s—but it’s now looking at an estimated shortfall of $765 million. More than 10 percent of the money the state has already planned to spend has simply vanished. While Auntie Em and Uncle Henry may have gotten an income tax cut, Dorothy might be heading back to a school of over-crowded classrooms, drastically reduced learning resources, and discontinued bus service.

Spending cuts alone are not going to cover the shortfall, so Governor Sam Brownback is now suggesting raising sales taxes. (This is a bad idea for a number of reasons, but that’s the subject for another blog.)

Back in 2012, shortly after Brownback had shepherded his pet tax package through the Kansas Legislature, he assured the people in an op ed that the plan would be “like a shot of adrenaline into the heart of the Kansas economy” because it would spur the creation of new jobs.

It’s been nearly three years and it might be time for Kansas to start CPR before its economic heart is bled completely dry. Brownback would have been wise to look for a more realistic prognosis among other states—such as New Mexico—that had cut their income taxes in recent years. He might have seen that a state can’t will new jobs into being simply by cutting income taxes.

New Mexico, as you might recall, passed a top-heavy income tax cut in the early 2000s. Like the other five states that also slashed their income taxes during that decade, the idea was sold on the promise of new jobs. Of course, no such thing happened. Our job growth share rose by a tiny 0.6 percent and a recent report by the Center on Budget and Policy Priorities points out that it was more likely due to the huge increase in oil and gas prices during that decade. Oil and gas prices also drove the job growth that Oklahoma saw after its big income tax cut. However, the other four states that cut taxes in the 2000s—Arizona, Louisiana, Ohio and Rhode Island—actually saw a decrease in their shares of job growth.

Likewise with states that cut their income tax rates in the 1990s and the 2010s. On average, their job growth has been weaker than for the nation as a whole. Kansas, despite its massive tax cut, has seen job growth of just 3.1 percent since its cuts went into effect while the nation’s job growth rate has been 4.5 percent.

Income tax cuts are a zero-sum game when it comes to state economies. States can’t spend money they don’t have, so they either must cut spending (which often means cutting jobs) or raise taxes on someone else to make up for the cut. Essentially, the same amount of money that’s allowed to flow into the economy by the tax cuts is taken back out of the economy somewhere else.

Although New Mexico’s personal income tax cuts didn’t bring the state any economic benefits, at least they didn’t break the bank like they have for Kansas. Again, that was due to high oil and gas prices and a strong economy. Of course, the economy and oil and gas prices have all taken a hit since then, but New Mexico policymakers are still trying to conjure up new jobs by way of magic tax cuts. In 2013, we slashed corporate income taxes. We have seen some job growth since then but it’s been almost entirely in the health care sector because more people have health coverage thanks to Obamacare. New Mexico’s policymakers need to keep in mind that neither of these tax cut schemes have created jobs before they start to overhaul our entire tax system. Meanwhile, just like Kansas, we’re collecting less and less money for critical services like education, public health, and first responders. No wonder people are leaving the state. Kansas has been losing people to other states, too. None of them are leaving by way of tornado, like Dorothy did, but most of them are probably glad they’re not in Kansas anymore.

Bill Jordan, MA, is Senior Policy Advisor/Governmental Relations for New Mexico Voices for Children.