Prosperity Watch Issue 36, No. 1: Huge Income Tax Cuts in Kansas Fail to Spur Promised Economic Renaissance

In the face of overwhelming evidence to the contrary, legislative leaders and Governor McCrory have mistakenly claimed that cutting corporate and personal income taxes will make North Carolina more economically competitive for outside investment and job creation. Using this misguided logic, the General Assembly passed and the governor signed a tax plan that shifts the tax load to middle- and low-income taxpayers while providing huge tax cuts to wealthy taxpayers and profitable corporations. A conservative estimate of the revenue loss is $2.4 billion over the next five years.

Given that these tax cuts just took effect two months ago, sufficient evidence is not available from the North Carolina experiment to assess the impact on the economy. Fortunately, we can look at the experience of other states that have recently pursued similar experiments with enacting deep tax cuts. And for one such state—Kansas—the results are not promising for the proponents of tax cuts as a magic solution for creating jobs.

In 2012, Kansas Governor Brownback and his political allies passed income tax cuts that will result in a cumulative revenue loss of more than $5 billion by 2019. Proponents in Kansas declared that the huge tax cuts would boost the state’s economy. To the contrary, Kansas’s economic performance in the wake of the tax cuts has been far from spectacular. The state has added jobs more slowly than the U.S. as a whole since the tax cuts took effect (See chart below). On average, Kansans earned a lower weekly wage at the end of last year than they did a year earlier and the net growth in registered businesses was smaller in 2013 than in 2012, the year before the tax cuts took effect. The tax cuts have clearly not lived up to the promise of economic vitality.

 

Not only have these tax cuts failed to spark the job creation promised by their proponents, even more troublingly, the revenue losses from these tax reductions also have dramatically undermined the very public investments that make robust economic growth and job creation possible for the long-term. The massive revenue loss has meant continued state funding cuts to public schools, colleges and universities, and healthcare services, among other public services.

The massive spending cuts required by this experiment should concern North Carolina.  The significant revenue loss resulting from the tax plan passed in North Carolina last year also will likely mean continued cuts to important public investments. For example, in the current FY 2014-15 budget, state leaders cut funding for initiatives that support economic development in rural and distressed communities across the state. These economic development initiatives have historically played an important role in promoting economic opportunity for individuals and families living in these communities.

North Carolinians want an economy that promotes economic prosperity for all. As the Kansas experience highlights, huge income tax cuts are unlikely to boost the state’s economy or promote broadly shared prosperity and fall far short of promoting an economy that works for all North Carolinians.
 

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