Earlier today on this here blog, Jane Porter noted that Volvo had joined a growing list of car manufacturers that did not want to locate a plant in North Carolina, despite the governor’s best attempts at seduction. Jane pointed out that Volvo comes from Sweden, which loves the gays, might have had a teensy-weensy problem with the so-called “religious freedom” bills being bandied about.
Perhaps. Volvo, however, still has eyes for Georgia and South Carolina (which has to be a little embarrassing for our man McCrory), and those states are hardly bastions of sexual progressivism. I won’t pretend to know what made the Swedes decide against us—I suspect it has more to do with a quickening race to the bottom in which we are thankfully behind—but I will add this announcement to the mounting mass of evidence that supply-side economics, which so enraptures North Carolina Republicans, is, empirically speaking, absolute horseshit.
After all, the massive tax cuts the General Assembly pushed through a couple of years ago were explicitly designed to boost the state’s economy and job market by making the state more competitive with its Southern neighbors. But that’s not really panning out, at least not to the degree voters were sold. Sure, the unemployment rate has dropped, but it’s dropped everywhere. North Carolina is definitionally middling, tied with Oregon and Maryland for 25th out of 50 states with its 5.4 percent rate, according to the U.S. Bureau of Labor Statistics. There are more than a quarter-million state residents looking for work, and the state is still some 430,000 jobs short of pre-recession-level targets, according to the N.C. Budget & Tax Center, a left-leaning policy shop affiliated with the N.C. Justice Center.
But, you say, those tax cuts have only been with us a year, and while, yes, they’ve blown a gaping hole in the state’s budget, we should be patient. The results will come. And besides, we’re doing better than South Carolina and Georgia and Florida and Tennessee and Mississippi, our Southern rivals.
All of that is true. But it’s also true that North Carolina’s approach—cutting taxes mainly for the wealthy, hacking regulations and funding for schools and social services, then hoping this spurs an economic boom that will recapture all of the lost tax revenue (trickle down, baby!)—has been tried before. And it has failed before.
And over in Kansas, it is failing right now, in a spectacular way.
Coincidentally, the Budget & Tax Center hosted two analysts from its Kansas counterpart, the Kansas Center for Economic Growth, at a luncheon today at the Marbles Kids Museum in downtown Raleigh to talk about the lessons North Carolina can and should take away from the ongoing Kansas Experiment. One of them, Duane Goosen, was a former lawmaker and state budget director. The other, Annie McKay, is KCEG’s executive director.
I wasn’t able to attend the luncheon, but I did chat by phone with Goosen and McKay this morning.
The gist is that, about a year after Sam Brownback won the governorship in 2010, the state legislature there passed a series of fairly dramatic tax cuts, not unlike the ones we saw here in 2013. Kansas, unlike North Carolina, kept a tiered system in which the wealthy pay a higher rate. (North Carolina flattened and made more regressive its individual income tax, meaning the poor pay a considerably larger percentage of their incomes in state tax than the rich.) But Brownback and company slashed the rates, bringing the top bracket down from 6.45 percent to 4.76 percent. Just as important, in the name of economic development, the reforms exempted 330,000 small businesses from paying the corporate income tax.
This was part of Brownback’s plan to eventually end the income tax altogether. “Tonight,” he said in a State of the State address, “we are here to take another step on our path to no state income tax. Look out Texas, here comes Kansas!”
The sales pitch there, like here, was that the tax cuts would generate such an economic boom that the state would magically offset the revenue losses.
That didn’t happen.
The first year after the tax cuts went into effect, Goosen says, the state lost a staggering 11 percent in revenue, a greater loss than the first three years of the Great Recession, even as it began to rebound from that recession and should have seen its coffer fuller year-over-year. The state made some cuts, but mostly used its reserve funds to stay afloat. Now those return funds are gone, and the revenue hasn’t started pouring in.
“The fallout from that is huge,” Goosen told me.
Indeed. Check out this graphic, from a new KCEG report out earlier this month:
In case you can’t read the small print, that’s a 5 percent decrease to local governments, 6 percent decrease to K-12 education, and a 23 percent decrease to libraries. (Corrections, however, are getting more money. Of course.) To fill in the funding gap, local governments are raising taxes. And the state Supreme Court ruled last year the Brownback’s education funding was unconstitutionally and impermissibly low. Kansas, McKay adds, is raiding its highway maintenance fund to fill in the many holes.
“There’s no money in the bank,” Goosen says. “We’re $600, $700 million below even a conservative set of expenses.” Making that up would require 10-12 percent budget cuts.
Oh, and it’s not like the state economy has gone gangbusters, either. “Explosive job growth?” McKay says. “That hasn’t happened.”
Of course, Brownback, though he had lackluster approval ratings, did win reelection last November. And he won in part because he sold his economic program as the shot in the arm the state needed—“The sun is shining in Kansas and don’t let anyone tell you different,” he said. It worked. And then a week later, everything went to shit.
Nov. 10, 2014: A new revenue estimate revealed the dire reality. Kansas is on pace to collect $1 billion less in revenue through 2016 than its projected expenses. After exhausting the reserve fund, officials would still need to find $280 million to balance the budget this fiscal year, and an additional $436 million next year. Since then, those numbers have grown.
Confronted by reporters about the shortfall, Brownback said he was unaware of the huge budget gap before his election. “I knew what the public knew,” he said.
“Since the election,” Goosen says, “even more Kansans have become aware of the fact that we’re on a course that is not working out very well. … Our lawmakers don’t have the ability to look forward. They have to look at how do we pull things backwards.”
And that, they say, is the path that North Carolina may well be headed down.
“I think the key lesson is that tax cuts are not magic,” says Goosen. “It’s seductive to say we can cut taxes and revenue will still come in. Our experience has proved that doesn’t work.”