Tax reform is not about how much tax should be collected or who should pay; it’s about solving a very serious employment problem and avoiding budgetary and economic catastrophe.
Our recent study, “Major Structural Deficits Looming in Kansas
”, explains how Kansas is potentially facing General Fund deficits totaling $5 billion over the next eleven years. Not even average revenue growth will be able to offset the enormous cost increases coming from full implementation of ObamaCare and more realistic funding of KPERS, the state employee pension plan.
Alternatively, if all other spending is adjusted based on available revenue (assuming 3.5% annual growth) KPERS and Medicaid will consume up to 45% of SGF revenue by FY 2023 and have a considerable ‘crowding out’ effect on school funding and other expenditures.
Kansas would need sustained annual private sector GDP growth of approximately 6% in order to withstand the highly probable $5 billion deficit scenario. That is very unlikely to occur under the current tax system especially as the state continues to deal with staggering private sector job losses.
Kansas lost 79,700 private sector jobs between April 2008 and October 2010, a 7% decline from peak to trough. In contrast, following the last recession, it took 70 months to return to peak employment (Kansas lost 46,200 private sector jobs between November 2000 and July 2003) when private sector employment ‘only’ dropped by 4.6%. Recovery will likely take much longer this time, and not just because employment fell nearly twice as much.
The state and local tax burden
has a significant impact on economic growth, and Kansas is especially uncompetitive among regional states
. Low-burden states have higher job creation
, their Gross Domestic Product
grow faster and their citizens enjoy stronger payroll gains
The Tax Foundation prepares an annual ranking of states’ tax burdens. They calculate the burden by dividing total state and local tax collections by personal income (essentially, an affordability index). Let’s see how the ten states with lowest tax burdens perform relative to those with the ten highest burdens.
Private Sector Job Creation
Jobs and taxpayers have been migrating to states with the lowest tax burdens for years. Between 1998 and 2011, the ten states with the highest state and local tax burden (as ranked by the Tax Foundation) experienced just 2.6% growth in private sector employment, whereas the ten states with the lowest burdens grew employment by 11.2%.
Source: Bureau of Labor Statistics
At the same time, Kansas’ private sector employment increased by a mere 0.3%. To put that in perspective, while Kansas has 210,600 more total residents than in 1998, there are only 3,275 more private sector jobs, over the same period of time.
We went back to 1998 because we initially wanted to do a 10-year look back from Kansas’ peak in 2008. That comparison revealed a similar pattern; the high-burden states gained 7% private sector jobs but less than the national average of 7.8% and well below the low-burden states’ gain of 14.6%. Kansas gained only 5.2% between 1998 and 2008.
Wage & Salary Disbursements
The low-burden states also experienced more growth in Wage & Salary Disbursements.
Source: Bureau of Economic Analysis
There were also much larger population gains in the low-burden states. Population grew 10.8% in the ten highest-burden states between 1998 and 2011, whereas the ten lowest-burden states saw gains of 24.4% Of course, other factors impact population changes but domestic migration patterns (U.S. residents moving in and out of states) provide valuable job- and tax-related insight.
Source: Census Bureau *2000 - 2009 and 2010 - 2011
As we saw with jobs, there is a very clear pattern – people are choosing to leave high-burden states (minus 4.3%) and low-burden states are the beneficiaries (+ 3.5%). Louisiana is one of the ten low-burden states and lost population due to Hurricane Katrina; the other nine low-burden states had a 4.6% gain from domestic migration.
Gross Domestic Product
Job creation, wage and salary disbursements and domestic migration are strong individual indicators of a state’s economic vitality. Gross Domestic Product (GDP) measures total economic activity within a region. Tracking changes in private sector GDP shows that low-burden states have superior overall economic performance. (Data for 2011 is not yet available.)
Source: Bureau of Economic Analysis
States with No Personal Income Tax
A basic principle of economics is that if you want less of something, tax it. Indeed, that’s the driving force behind the so-called ‘sin’ taxes on alcohol and tobacco. The same theory applies to income generation – the higher it’s taxed, the less that’s created because the incentive to create more is removed.
States with the lowest tax burdens have much stronger economic performance, and the performance gaps between those with no personal income tax and all other states are sometimes even greater.
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau
With lack of employment being such a critical issue in this country, it is especially noteworthy that the nine states with no personal income tax added 2.2 million jobs over the last thirteen years while the rest of the country only added 1.1 million jobs - that's double the job growth.
Kansas’ Tax Burden is Getting Worse
Kansas lost private sector jobs between 1998 and 2010 and more people chose to leave Kansas than chose to move here. Kansas also has relatively weak movement in wage and salary disbursements and sub-standard growth in private sector GDP. But that should come as no surprise, knowing how the tax burden impacts these performance measures.
Kansas’ tax burden has been getting progressively worse as evidenced by the Tax Foundation’s annual rankings:
- 25th highest based on 2005 taxes.
- 23rd highest based on 2008 taxes.
- 19th highest based on 2009 taxes.
Since then, Kansans have been hit nearly $500 million more in sales, unemployment and property taxes. When the rankings on 2010 taxes come out, Kansas could easily have one of the 15 highest burdens.
Comparison to Regional States
Kansas has a very high state and local tax burden relative to other states in the region and that creates an extremely uncompetitive environment.
Source: Tax Foundation
Nebraska is the only regional state with a higher tax burden than Kansas. Perhaps not coincidentally, Nebraska is the only regional state from which Kansas has gained taxable income. The Internal Revenue Service publishes data showing movement of Adjusted Gross Income from one state to another, based on addresses that changed on tax return filings. The Tax Foundation collects the IRS data and publishes interactive tables that show the impact of taxpayers choosing to leave high-burden states.
Source: Internal Revenue Service via Tax Foundation
Kansas lost over a billion dollars in adjusted gross income to neighboring states in the last ten years. It is especially noteworthy that the amount of AGI lost to neighboring states gets progressively worse as the gap widens between Kansas’ and each state’s tax burden rank.
Controlling Spending is the Secret to Low Taxes
Some people think the states with No Income Tax can only do so because they have access to unusual revenue streams, but fortunately that’s not true. Florida may benefit from tourism, Texas from oil, etc., but they could still have a high tax burden if they spent more. The secret to having a low tax burden is to control spending and that’s exactly what those states do.
According to the National Association of State Budget Officers, the states with no income tax spent an average of $2,444 per-resident (total state funds*) in 2010; the rest of the country spent $3,572 per-resident, or 46% more. Kansas spent $3,216 per-resident, or 32% more than the states with no income tax.
2010 General Fund spending per-resident averaged $1,590 in the states with no income tax; the other states spent $2,112 per-resident, or 33% more. At the same time, Kansas spent $1,843 per-resident, or 16% more than the states with no income tax.
Source: National Association of State Budget Officers
A high tax burden isn’t the only thing employers consider when deciding to move or expand their businesses but there’s no doubt that it plays a significant role. Allowing employers and taxpayers to keep more of their hard-earned money encourages the risk-taking that’s required to create jobs and leaves more money available to spend on taxable goods and services.
Not everyone agrees, however, that reducing Kansas’ increasingly high tax burden is necessary. Those who oppose doing so like to point to other factors that are important to job creators. It’s true that things like infrastructure and having a skilled workforce are important, and both exist in Kansas. But in today’s hyper-competitive global economy, it’s not enough to compare well on some factors – you have to be competitive on everything. Not to put too fine a point on it, but if highways, schools and other factors were enough to be competitive, Kansas wouldn’t have one of the worst private sector job records in the country.
Efforts to rationalize the retention of a high tax burden will only make a bad economic situation worse. The facts clearly demonstrate that jobs and taxpayers have been migrating away from high-burden states and there’s no reason to believe that that will change. If anything, it could accelerate.
The transition to a lower tax burden won’t be easy but it must be done in order to reverse the economic stagnation Kansas has suffered for over a decade. Of course, in order to reduce the tax burden we have to reduce government spending, but that doesn’t mean that necessary services must be sacrificed. There are many ways to make effective programs operate more efficiently and evaluating programs will identify some that are no longer effective.
The tax-and-spend ways of the past have grown government at the expense of jobs and prosperity. The past has been defined by growing government in Kansas. The future must be defined by putting taxpayers first.