As reported here on Friday, the battle is on to protect every last dollar of government spending everywhere. Tomorrow President Trump will make his first speech to a joint session of Congress. The buzz is that much of the speech will be about major spending cuts in certain departments. How to head this off?
At the New York Times, today's contribution is a big unsigned editorial about the travails of Kansas, headline "Kansas' Trickle-Down Flood of Red Ink." The gist is that the state of Kansas has already tried this ridiculous idea that tax cuts can spur economic growth, and all it has to show for the effort is a big $1.2 billion two-year projected budget deficit -- a "flood of red ink." Tax cuts are a proven failure! The editorial reports on the recent noble efforts of some Kansas legislators to close the budget gap by undoing tax cuts dating from 2012-13, an effort just now thwarted by a veto from Governor Sam Brownback. As usual for a Times editorial, it drips with scorn for the idiots who think that tax cuts might ever be a good idea. Excerpt:
[Kansas Governor Brownback] made his state an experimental showcase for the driving philosophy of supply-side theorists like Paul Ryan, the House speaker, who served as a staff acolyte when Mr. Brownback was in the Senate. . . . The result [in the Kansas legislature] was less a victory for Mr. Brownback than a rebuke to his leadership, in particular his near-suicidal clinging to his trickle-down obsession when he should be engineering a compromise with the Legislature. Kansas faces a $1.2 billion budget gap across the next two years that must be dealt with.
Somehow though, in the editorial and elsewhere in this edition of the rag, the Times does not mention anything about our neighboring state of Connecticut, or how it is doing relative to Kansas. I'm not saying they have to, but then, Connecticut is a state quite similar to Kansas in some respects. For example, the population of Kansas is just under 3 million, while Connecticut's is just under 3.6 million. However, Connecticut's state budget, at about $20.5 billion (about $5900 per capita) is noticeably higher than that of Kansas, which is about $16 billion (about $5300 per capita).
Kansas and Connecticut in recent years have adopted opposite approaches to dealing with the demands of government constituencies for more spending. In Kansas, as the Times notes, there have been income tax cuts. Until 2013, there was a top rate of 6.25%, but the cuts at that time lowered the rate to 4.9%, and also put into effect further scheduled cuts. The top rate for 2017 is 4.6%. The Times attributes Kansas' projected deficit of $1.2 billion to those cuts. In Connecticut, top income tax rates have only gone up. The Connecticut income tax only began in 1992, at a top rate of 1.5%; the most recent increase was from 6.7% to 6.99% in 2015.
So how have the ever-increasing income tax rates done in ending Connecticut's budget deficits? According to the Connecticut Mirror from November, "nonpartisan analysts" who had been given a look at Connecticut's numbers were projecting a deficit of $1.5 billion for 2017, and $1.8 billion for 2018 -- a total of $3.3 billion over the two years. That's close to triple Kansas' projected deficits over the same period. Funny that Pravda doesn't mention this. (I'm old enough to remember when in 1991 then Connecticut Governor Lowell Weicker pitched his 1.5% income tax as a temporary measure to deal with a one-time budget "emergency.")
Meanwhile, how is Kansas faring versus Connecticut in the area of economic growth? I would preface this by pointing out that the effects of either good economic policy or bad take effect slowly and can only be noticed over a number of years. For an example on the "bad" side, note that Venezuela was reporting an economic "miracle" of spectacular growth as late as 2013, some 15 years after the ascendancy of Chavez, supposedly as a result of blowout government spending of the socialist regime. Then the bottom fell out. On the reverse side, Kansas' income tax cut of 1.65% over several years is not nothing, but is relatively small when viewed against a federal top rate of about 39% that applies nationwide. Gov. Brownback has rather exaggerated his case by calling the cuts "revolutionary" at some times (although perhaps it is the direction of the change, rather than the magnitude, that he is referring to). Anyway, can we find anything noticeable in the numbers? In summary, not much.
The unemployment rate from the U.S. Labor Department for Kansas for December 2016 was 4.2%. For Connecticut it was 4.4%. (Not a big deal.) A chart from the federal Bureau of Labor Statistics here shows that Kansas gained about 60,000 jobs from 2012 to 2016 (on a base of about 1.4 million), but then promptly lost about 30,000 of them back in 2016. That loss of 30,000 jobs came without any noticeable increase in the unemployment rate. Was it even real, versus a quirk of the statistics? A chart here from the Connecticut Department of Numbers shows Connecticut employment growing about 40,000 from 2012 to 2016 on the employer survey. Overall, on these two measures, the results of Kansas and Connecticut over the past few years cannot really be distinguished.
On the other hand, I would point out that the state of Connecticut was booming back in the 70s and 80s, when New York income taxes were higher than they are today and Connecticut had no income tax at all. Then Connecticut put in the income tax in 1992, and they have had essentially no job growth at all in the 25 years since. Moreover, in the most recent three years, Connecticut has seen population declines. There could be other causes for this kind of long-term stagnation, but the ever-increasing income tax stands out as a major one. The other big ones are aggressive public sector unions and an associated massive pension debt. Is this what the New York Times would recommend for Kansas? And how about for the federal government?
UPDATE, March 1: In the comments, mvs4000 suggests comparing real GDP growth of Kansas versus Connecticut from economic data published by the St. Louis Fed. For those interested, the answers are: Connecticut real GDP for 2012 was $228.2 billion, and for 2015 (latest) $225.5 billion, a decline of $2.7 billion, or 1.2% over those three years. Kansas real GDP went from $131.3 billion in 2012 to $134.3 billion in 2015, growth of 2.2% in three years. Not great, but hey, way better than Connecticut. Also, as Michael Moran points out in the comments, two of Kansas' main industries, energy and agriculture, had downturns in the period; Connecticut does not have the same excuse. Out there in the rest of the states, there is not a perfect correlation between top income tax rates and economic growth, at least in this particular relatively short window, but there definitely is a general trend in favor of the lower-tax states. Highest-tax California saw respectable growth over the same 2012-15 period of 10.5% ($2,013.6 billion to $2,225.4 billion), while next-highest-tax New York saw not-so-respectable growth of only 1.8% ($1,231.8 billion to $1,254.8 billion). At the other end of the tax scale, zero income tax Texas had growth of 15.2% ($1,310.5 billion to $1,509.8 billion) -- and that's even with the collapse of oil prices in 2014-15. Zero income tax Florida had growth of 9.0% ($729.4 billion to $795.0 billion). If you want to check out any other states, go to fred.stlouisfed.org.