Anna Baumann: Cutting tax rates proving to be a fad hurting state budgets

August 1, 2014 

Anna Baumann is research and policy associate at the Kentucky Center for Economic Policy, based in Berea.

  • Anna Baumann is research and policy associate at the Kentucky Center for Economic Policy, based in Berea.

Before going on a fad diet, it's best to check out how other folks are doing on the plan. Are they looking good and feeling more energized, or do they appear weak and tired, in danger of reducing their metabolism and harming their long-term health?

There's a fad diet going around state legislatures that would cut the most vital and fair source of fuel for investments in education, public safety and health — the income tax — under the misguided belief that doing so will create jobs.

You don't have to be an expert on the short- and long-term cost-effectiveness of state income tax cuts to know they're a bad idea. Just take a look at how Kansas and North Carolina are doing on the plan.

In 2012, Kansas slashed its top individual income tax rate by 24 percent, among other cuts, with the promise that doing so would attract jobs to the state. That's about a $20,000 annual tax cut for the state's wealthiest citizens, on average.

But instead of revving up the economy's engine, Kansas is creating jobs at a slower rate than the national average. The cuts also helped create the $338-million revenue shortfall in budget year 2014 Kansas is struggling with, leaving it without enough resources to pay for basic needs like education and health care.

We Kentuckians know all too well how insufficient revenue leads to cuts in vital services like child care, to underfunding of our public schools and to mounting higher education costs for families.

We also know that as our lawmakers try to mitigate the short-term effects of revenue losses, they pass the costs to the future. Past decisions to underfund our pension system, for instance, have led to the crisis we face today.

North Carolina is another example of dieting gone wrong. That state lowered its income tax rates in 2013; created a single rate for everyone, regardless of ability to pay. The state ended budget year 2014 with $445 million less than it needed to provide services to the state's residents.

Even deeper cuts that went into effect in July are expected to cost the state $1 billion by 2016. Furthermore, it looks like the high-income "job creators" whose rates were cut by 25 percent are not returning the favor: North Carolina is adding jobs at a sluggish pace, workers are still leaving the labor force and most new jobs pay low wages.

North Carolina's story is especially tragic since it had long been a shining example for the rest of us in the South for its robust, forward-thinking investments in education that strengthened its economy. Now, it's at risk of rolling back that progress.

So why doesn't the fad tax diet work to create jobs and grow states' economies?

The truth is that the tax code is just not a big factor in the decisions that people and businesses make about where to live, work and invest. People don't move that much in general, research shows, and those who do are driven by job opportunities, family considerations, housing costs and the weather.

Businesses decide where to locate based primarily on the skills of the work force, strength of the roads and other infrastructure and access to suppliers and markets — not taxes.

In other words, tax cuts reward people and businesses for decisions they make based on other factors, while draining investments in the factors that do matter.

We all know that a good health requires a balanced diet and a decent amount of exercise.

Likewise, a vibrant state requires a variety of healthy revenue sources to make the investments in education and other areas we need to grow, including an income tax that asks the wealthy to chip in their fair share.

Here in Kentucky, we should redouble our efforts to make our economy healthy through fair and adequate tax reform, and ignore phony advice about what works.

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