- After deep cuts, state economies fail to boom as promised
- `You shouldn’t think there’s a magic bullet' for prosperity
To get an idea of what might happen to the U.S. economy if a Republican president were to impose deep tax cuts, consider a humble string of multicolored plastic beads, the cheap-but-coveted souvenir of Mardi Gras.
Such throws had been exempt from sales tax under Louisiana law, but lawmakers this year changed that to help close a $3 billion budget deficit caused by plunging oil prices and the largest income-tax cut in state history.
“Mardi Gras is the greatest free show on Earth for everyone except the krewes putting on the parades,” said Sherrell Gorman, captain of the Krewe of Isis, one of dozens that parade before Fat Tuesday and must now pay more for their hurled trinkets. “If taxing non-profits on Mardi Gras beads is the only way they can make up the deficit, I don’t know if they’re looking in the right direction.”
Voters in Wisconsin’s Republican primary Tuesday can choose among Donald Trump, John Kasich and Ted Cruz, all of whom promise tax cuts that could cost as much as $10 trillion in revenue over 10 years -- and an ensuing economic boom as spending is unleashed. Yet voters need look no further than Louisiana, Kansas and Oklahoma to see what happens when economies fail to grow as promised.
Those states, which cut taxes in Tea Party-inspired measures, were in 2014 and 2015 among the bottom 20 of the Bloomberg Economic Evaluation of States, which measures changes in fiscal health. They face spending cuts, tax increases and higher debt.
“For years, our state spent more in corporate-tax breaks then we took in from income taxes,” John Bel Edwards, Louisiana’s new Democratic governor, said in an e-mailed statement. “That practice has left critical state services on the chopping block.”
Louisiana plans to sell bonds this month in a refinancing that will let it postpone $80 million in debt payments. The deal will probably come at an elevated cost based on the recent widening of spreads between the state’s municipal bonds and top-rated securities; investors are demanding about a fifth of a percent in additional yield.
Oklahoma also may turn to the bond market to close a $1.3 billion deficit, and Kansas may sell securities backed by payments from a settlement with tobacco companies to stay afloat. Sam Brownback, a former congressman and senator who became Kansas governor in 2011, presented his state as a model to the nation when he presided over a 26 percent cut in state income taxes, as well as reductions in levies on sales and businesses.
He said Kansas was undertaking "a real live experiment" in economic growth.
As states crawled out of the recession’s wreckage, 17 plus Washington, D.C., cut income taxes from 2011 to 2015, according to the National Conference of State Legislatures. That includes Illinois and Delaware, which saw temporary increases end. This year, Indiana has passed a cut and more are pending.
Republican presidential candidates advocate similar policies for the nation.
Cruz is pushing a 10 percent flat income tax. Trump and Kasich would merge the brackets into three, lowering top rates. All three have argued that lifting the burden encourages growth, which generates revenue.
Trump’s plan would cost the federal treasury $10.1 trillion over a decade, even factoring in economic growth including 5.3 million new jobs, according to an analysis by the nonprofit Tax Foundation. Cruz’s plan would cost $768 billion over a decade, the foundation said. It didn’t offer an estimate on Kasich’s proposal, saying the Ohio governor didn’t give enough detail.
Conservatives shouldn’t expect tax cuts to pay for themselves, said David Williams, president of the Washington-based Taxpayers Protection Alliance.
"Spending reform must also be addressed," Williams said. "We are quite disappointed that the Republican candidates haven’t talked enough about spending cuts."
For their part, Democrats Hillary Clinton and Bernie Sanders are pushing for higher taxes, with Clinton’s aimed at incomes of more than $5 million and Sanders’ at both middle and higher earners.
A review of recent state income-tax cuts published in September by the Tax Policy Center at the Brookings Institution found little connection between lower taxes and growth. Reducing levies “could instead force punishing spending cuts” as revenue falls and the ability to borrow becomes limited.
“You shouldn’t think there’s a magic bullet that’s going to lead to prosperity,” said Kim Rueben, a co-author.
Wisconsin Governor Scott Walker, a former Republican presidential candidate who endorsed Cruz, has signed an estimated $4.7 billion in tax cuts since taking office in 2011. Walker pitched his tax cuts as a cornerstone of his goal of adding 250,000 jobs in his first term. Job growth in Wisconsin came to about 130,000 during Walker’s first term, according to the U.S. Bureau of Labor Statistics.
In Louisiana, former Democratic Governor Kathleen Blanco cut taxes after revenue boomed amid reconstruction after Hurricane Katrina. Republican Bobby Jindal, who took office in 2008, did it again. Structural deficits grew last year to about $1.6 billion, or 18 percent of spending.
The state had to find fixes, said Emily Raimes, an analyst with Moody’s Investors Service. Lawmakers in February raised sales, alcohol and tobacco taxes, which disproportionately affect the poor. They also temporarily removed exemptions, including on Mardi Gras beads.
The state still faced a $70 million deficit in the current fiscal year and an $800 million hole in next year’s budget. Edwards reduced spending for health care rather than gut higher education, which already was slated to absorb deep reductions.
“A strategy of cutting taxes to spur growth and make up the difference doesn’t always play out as expected,” said Raimes.
In Oklahoma, officials may borrow as they confront a $1.3 billion deficit. State officials suggested selling bonds for capital projects usually funded on a pay-as-you basis.
The state had been making do until falling oil prices cut revenue. Now, with income-tax cuts kicking in, Republican Governor Mary Fallin has proposed raising $910 million by removing sales-tax exemptions and raising cigarette taxes. She would cut spending by $167 million. The state also is considering reductions in education and benefits for poor residents.
In Kansas, which faced a $600 million budget deficit, Brownback has reversed course. He and his fellow Republicans in the legislature agreed to slow income-tax cuts while raising levies on cigarettes and alcohol.
Yet even after the largest revenue increase in state history last year, Kansas was unable to balance its budget. It has cut spending for schools and universities, roads, bridges and highways and public pensions.
Two school districts are ending the year prematurely, and Kansas limited ATM cash withdrawals to $25 a day for welfare recipients. The state also cut Medicaid benefits to more than 1,000 people with disabilities.
Brownback’s press office didn’t return a call seeking comment on the budget.
“Kansas is the cautionary tale,” said Rueben.