In Olympia these days, lawmakers are high centered in a second special session over the budget to operate the state for the next two years. The stalemate has come down to the choice of raising taxes or funding government within the current revenues.
Gov. Jay Inslee and fellow Democrats call for a new 5 percent capital gains tax they estimate will generate another $550 million. In addition, Inslee has proposed a new billion dollar tax scheme on carbon emissions. On the other hand, Republicans believe the projected $3.2 billion (9.2 percent) increase in revenue collections already expected over the 2015-17 budget cycle will suffice.
At our state capitol, nobody is talking about reducing taxes. In Kansas and North Carolina, however, tax cuts implemented a couple of years ago are creating jobs and increasing worker wages.
In 2013, new North Carolina Gov. Pat McCrory (R) felt compelled to turn around the state’s sluggish economy. Lawmakers slashed the state’s top personal income tax rate to 5.75 percent from 7.75 percent, which had been the highest in the South. The corporate tax rate was cut from 6.9 percent to 5 percent and the estate tax was eliminated.
The result: nearly 200,000 jobs have been added and the unemployment rate has fallen from the 7.9 percent to 5.5 percent. Most importantly, it has given people in rural areas where the jobless rate topped 20 percent a chance to go back to work.
In Kansas, lawmakers reduced the top rate on the personal income tax from 6.45 percent to 4.9 percent. They also eliminated the income tax for small business owners who file as individuals, a broad group that includes sole proprietors, limited liability partnerships and S-corporations.
Since then, hourly wages have grown by 3.5 percent compared with the national average of 1.9% and the unemployment rate has dropped to 4.2 percent.
In contrast, Washington’s statewide jobless rate in April was 5.5 percent, with 80 percent of Washington counties reporting unemployment rates above the national average.
Do tax cuts really make a difference? One way to gauge that is to compare the economic performance of Kansas City, Kansas with Kansas City, Missouri, right across the state line.
Over the past two years, private-sector jobs on the Kansas side increased 5.6 percent compared with 2.2 percent job growth on the Missouri side. In the same period, hourly wages grew $1.22 on the Kansas side compared with $0.61 on the Missouri side.
While critics complain that the Kansas tax cuts have blown a hole in the state budget—$344 million in the 2015 fiscal year and $600 million in the next—the North Carolina reforms, which included changing the state’s unemployment tax system, generated a $400 million revenue surplus.
According to the Heritage Foundation, North Carolina’s former budget director Art Pope says one difference between the two states is that, “we cut spending too. Kansas didn’t.”
Kansas is betting that more private sector jobs and tax revenues from economic growth will produce the same revenue surpluses.
Cutting taxes is politically risky.
Kansas Gov. Sam Brownback (R) was roundly criticized by liberals who tried to convince voters that higher taxes are a price that must be paid for progress, yet he beat back Democrat challenger Paul Davis in last November’s election.
In North Carolina, McCrory faced armies of protesters when he proposed cutting taxes and reducing unemployment benefits. But the bottom line is reforms in both states are working.
As Brownback explains: “If your objective is to grow the economy, would you rather put more money into government, or leave it in the hands of small business?”