Prosperity Watch Issue 39, No. 4: Kansas Tax Cut Experiment Greatly Reduces State Revenue, Serves as Cautionary Tale for North Carolina

As the national economy continues to recover from the Great Recession, most states are seeing growth in tax revenue and using the increased revenue to begin restoring funding to public investments. Other states, including North Carolina and Kansas, are instead cutting investments in core public services as a result of enacting huge tax cuts. In fact, North Carolina is more than three weeks into the new fiscal year without a revised budget because the state can’t afford the tax cuts and there are simply too few dollars available to finance state priorities.

Kansas’ tax cut experiment serves as a cautionary tale for North Carolina. As the 2014 fiscal year concluded at the end of June, news broke that Kansas’ tax cuts were far more costly and damaging than previously estimated, according to updated official revenue estimates.

In 2012, Kansas passed huge income tax cuts – considered perhaps the nation’s largest state tax cut ever – that were estimated to reduce annual revenue for public investments by more than $800 million. The reality in Kansas has been worse than expected, however. In fiscal year 2014, Kansas officials report that the state brought in $338 million less than anticipated. The lack of adequate revenue will likely mean continued cuts to public schools, colleges and universities, and healthcare services for Kansans. Cuts to these programs in Kansas and their damage to families and communities have been well documented and resulted in one high profile court case which determined the underfunding of public education unconstitutional.


 

Proponents of Kansas’ tax cut claimed that cutting taxes would boost the state’s economy. However, Kansas’ economy has not seen the exceptional growth promised. Since the tax cuts took effect, the state added jobs more slowly than the nation as a whole. Average earnings for Kansans are lower in the wake of the tax cuts than prior to the tax cuts taking effect. Furthermore, the state has not enjoyed exceptional business growth following the tax cuts.

North Carolina followed the path of Kansas and enacted huge income tax cuts in 2013 that were originally estimated to reduce state revenue by more than $524 million in the initial two years following the tax cuts. However, state lawmakers were faced with addressing a $445 million revenue shortfall for fiscal year 2014, which ended June 30, 2014. Revenue collections are projected to come in under projection by $191 million for fiscal year 2015.  The revenue shortfalls are largely a result of the tax cuts passed in North Carolina in 2013. Inadequate state revenue will likely mean more cuts to public schools, colleges and universities, healthcare services, and other public investments.

Proponents of North Carolina’s tax cuts also claimed that the tax cuts would create more jobs and boost the state’s economy. Fully assessing the merits of proponents claim requires time, as the tax cuts took effect in January 2014. Early signs do not look particularly promising, however. A deeper look into North Carolina’s declining unemployment rate highlights a declining labor force participation rate – meaning that a large number of unemployed individuals are falling out of the labor market altogether. Moreover, the overwhelming majority of net new jobs in the state are in sectors that pay low wages.

Leaders in other states considering tax cuts have expressed concern about Kansas’ failed experiment. Early outcomes from North Carolina’s tax cut experiment mimics Kansas – e.g. larger than expected reduction in state revenue. Revisiting the tax cuts passed in 2013 represents a prudent option to addressing the self-imposed revenue challenges North Carolina will like face in the years ahead.
 

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