Voice For Liberty

Category: Kansas state government

  • Kansas pension debate based on false premise?

    As Kansas has struggled to find a solution to the underfunded Kansas Public Employee Retirement System, or KPERS, a possibly false argument has been used against the desirability of moving to a defined contribution pension system.

    The system that has been in place in Kansas is a defined benefit system. Employees are guaranteed a monthly payment based on factors such as length of employment, salary, etc. The problem is that over the years, the state has not allocated enough funding to pay for the promised benefits. Many wanted the state this year to end the defined benefit plan for new employees, and instead enroll them in a defined contribution plan. In these plans, employees and employers make contributions to an account in the name of the employee. Contributions and investment earnings provide a benefit upon retirement. These plans, known as 401(k) plans, are common in the private sector.

    Critics of a move to a defined contribution plan, including the Wichita Eagle editorial board, warned that without new employees entering the defined benefit plan, it would fall farther behind in funding. (See KPERS problems must be confronted.)

    These “transition costs” were seen by many to be a powerful argument against a transition to a defined contribution plan. Perhaps as a result, Kansas adopted a hybrid plan where employees are guaranteed a minimum investment return on their contributions. While the guaranteed return is lower than the return KPES had been assuming, it still binds the state to provide a level of payments that it — if past history is a guide — may not be willing to fund.

    But new research shows that these transition costs — the main argument against moving to a defined contribution plan — are largely a myth, perpetuated by those who benefit from the status quo in public worker pensions plans. Andrew G. Biggs summarizes this research below, writing “Public-sector employees and the pension industrial complex are using deceptive and self-serving arguments despite having an obligation to provide the public with solid facts.”

    Public-Sector Pensions: The Transition Costs Myth

    Public-sector employees and the pension industrial complex are using deceptive and self-serving arguments despite having an obligation to provide the public with solid facts.
    By Andrew G. Biggs

    One essential difference between traditional defined-benefit (DB) pensions and newer 401(k)-style defined-contribution (DC) plans is that DC plans can’t generate unfunded liabilities. Under a DB plan, the employer promises employees a fixed retirement benefit regardless of how the plan’s investments fare. In a DC plan, by contrast, employers promise employees a fixed contribution, say, 5 percent of salary. Once that contribution is made, the employer’s obligation is fulfilled.

    DB pensions for state and local government employees are underfunded by between $700 billion and $4 trillion, depending on whose accounting you use. Most economists believe the latter figure is more accurate. In response, elected officials around the country are considering shifting public employees to DC plans.

    Public-sector employees — who enjoy their generous retirement benefits — and the pension industrial complex of plan managers, pension actuaries, and investment advisors don’t like DC plans. They’re pushing back with a novel argument: DB pensions’ massive unfunded liabilities create “transition costs” that make shifting to DC plans unfeasibly expensive. In other words, the more broke DB plans become, the more we have to stick with them.

    But as University of Arkansas economist Bob Costrell shows in a new report for the Laura and John Arnold Foundation, that argument doesn’t hold water.

    Continue reading at The American, the online magazine of the American Enterprise Institute.

  • Kansas must improve its budgeting process

    This year Kansas made a leap forward in reducing income tax rates. The next step for Kansas is to reduce its spending, both to match the reduced revenue that is forecast, but also to improve the efficiency of Kansas government and leave more money in the hands of the private sector. Specifically, Kansas needs to improve its budgeting process and streamline state government.

    In Kansas, like in many states, the budgeting process starts with the previous year’s spending. That is then adjusted for factors like inflation, caseloads, and policy changes that necessitate more (or rarely, less) spending. The result is that debates are waged over the increment in spending. Rarely is the base looked at to see if the spending is efficient, effective, or needed.

    There are several approaches Kansas could take to improve on this process. One is zero-based budgeting. In this approach, an agency’s budget set to zero. Then, every spending proposal must have a rational or justification for it to be added to the budget.

    Zero-based budgeting can be successful, but, according to the recent paper Zero-base Budgeting in the States from National Conference of State Legislatures, it requires a large commitment from the parties involved. It also can take a lot of time and resources. Kansas could start the process with just a few agencies, and each agency could go through the process periodically, say once every five or six years. Some states have abandoned the zero-based budgeting process.

    In its State Budget Reform Toolkit, American Legislative Exchange Council advocates a system called priority-based budgeting. This process starts with deciding on the core functions of state government. That, of course, can be a battle, as people have different ideas on what government should be doing.

    ALEC reports that “In 2003, Washington state actually implemented priority based budgeting to close a budget deficit of $2.4 billion without raising taxes.”

    The spending cuts Kansas needs to balance the budget are not large. Kansas Policy Institute has calculated that a one-time cut of 6.5 percent next year would be sufficient to bring the budget to balance.

    The problem that Kansas will face in reducing state spending and streamlining its government is that there are those who are opposed. Streamlining often means eliminating programs that aren’t needed, aren’t performing as expected, or are very costly. These programs, however, all have constituencies that benefit from them — the concept of concentrated benefits and dispersed costs that public choice economics has taught us. These constituencies will be sure to let everyone know how harmful it will be to them if a program is scaled back or ended.

    Streamlining also means that there may be fewer state employees. Some will say that the loss of state employees means a loss for the economy, as the state workers will no longer be receiving a paycheck and spending it. This reasoning, however, ignores the source of state workers’ pay: the taxpayers of Kansas. With fewer state employees, taxpayers will have more money to spend or invest. The problem is that it is easier to focus on the employees that may lose their jobs, as they are highly visible and they have vocal advocacy groups to watch out for them. This is an example of the seen and unseen, as explained by Henry Hazlitt.

  • Kansas STAR bonds vote tests beliefs in capitalism, economic freedom

    An upcoming vote in the Kansas Legislature, possibly today, will let Kansans know who is truly in favor of economic freedom, limited government, and free market capitalism — and who favors crony capitalism instead.

    The bill is Senate Substitute for HB2382: AN ACT concerning economic development; concerning the STAR bonds financing act; relating to the provisions regarding STAR bond projects; extending the sunset date. Under current law, the Kansas STAR bonds program will expire on July 1, 2012. This bill extends the program’s life for five years.

    The STAR bonds program allows increases in sales tax revenue to be directed to private interests rather than feeding the state treasury. The mechanism is that local governments like cities can sell bonds and give the proceeds to developers. Then, increments in sales tax revenues are used to make bond payments.

    In economic impact and effect, the STAR bonds program is a government spending program. Except: Like many spending programs implemented through the tax system, legislative appropriations are not required. No one has to vote to spend on a specific project. Can you imagine the legislature voting to grant $50 million over a period of years to a proposed development in northeast Wichita? That doesn’t seem likely. Few members would want to withstand the scrutiny of having voted in favor of such blatant cronyism.

    But under stealth-like tax expenditure programs like STAR bonds, that’s exactly what happens — except for the legislative voting part.

    Government spending programs like STAR bonds are sold to legislators as jobs programs. Development, it is said, will not happen unless project developers receive incentives through these spending programs. Since no legislator wants to be seen voting against jobs, many are susceptible to the seductive promise of jobs.

    But often these same legislators are in favor of tax cuts to create jobs. This is the case in the Kansas House, where many Republican members are in favor of reducing the state’s income tax as a way of creating economic growth and jobs. On this issue, these members are correct.

    But many of the same members voted earlier this year for a previous version of the STAR bonds extension bill. (See In Kansas, STAR bonds vote uplifted cronyism over capitalism.) These members voted in favor of a tax expenditure program. These two positions — voting for tax cuts, but voting for targeted spending through the tax system — cannot be reconciled. If government taxing and spending is bad, it is especially bad when part of tax expenditure programs like STAR bonds. And there’s plenty of evidence that government spending and taxation is a drag on the economy.

    It’s not just legislators that are holding these incongruous views. Secretary of Commerce Pat George promoted the STAR bonds program to legislators. This seems to be contrary to the spirit of tax reform plans Kansas Governor Sam Brownback promoted earlier in the session. At that time, he proposed ending spending programs implemented through the tax system. Historic preservation tax credits was a particular program that he wanted to end.

    The danger of false, or “crony” capitalism

    Last year at the time Brownback and a new, purportedly more conservative Kansas House took office, I wondered whether Kansas would pursue a business-friendly or capitalism-friendly path: “Plans for the Kansas Republican Party to make Kansas government more friendly to business run the risk of creating false, or crony capitalism instead of an environment of genuine growth opportunity for all business.” I quoted John Stossel:

    The word “capitalism” is used in two contradictory ways. Sometimes it’s used to mean the free market, or laissez faire. Other times it’s used to mean today’s government-guided economy. Logically, “capitalism” can’t be both things. Either markets are free or government controls them. We can’t have it both ways.

    The truth is that we don’t have a free market — government regulation and management are pervasive — so it’s misleading to say that “capitalism” caused today’s problems. The free market is innocent.

    But it’s fair to say that crony capitalism created the economic mess.

    But wait, you may say: Isn’t business and free-market capitalism the same thing? Not at all. Here’s what Milton Friedman had to say: “There’s a widespread belief and common conception that somehow or other business and economics are the same, that those people who are in favor of a free market are also in favor of everything that big business does. And those of us who have defended a free market have, over a long period of time, become accustomed to being called apologists for big business. But nothing could be farther from the truth. There’s a real distinction between being in favor of free markets and being in favor of whatever business does.” (emphasis added.)

    Friedman also knew very well of the discipline of free markets and how business will try to avoid it: “The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses generally prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.”

    The danger of Kansas government having a friendly relationship with Kansas business is that the state will circumvent free markets and promote crony, or false, capitalism in Kansas. It’s something that we need to be on the watch for. The vote on the STAR bonds project will let us know how our state is proceeding. If the upcoming vote goes as did the earlier votes on this matter, the verdict is clear: Kansas legislators — including many purported fiscal conservatives — prefer crony capitalism over free enterprise and genuine capitalism.

    The problem

    Government bureaucrats and politicians promote programs like STAR bonds as targeted investment in our economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Kansas economy.

    Arnold Kling has written about the ability of government experts to decide what investments should be made with public funds. There’s a problem with knowledge and power:

    As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

    When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

    Despite this knowledge problem, Kansas legislators are willing to give power to bureaucrats in the Department of Commerce (along with local government officials and bureaucrats) who feel they have the necessary knowledge to direct the investment of public funds. One thing is for sure: the state and its bureaucrats have the power to make these investments. They just don’t have — they can’t have — the knowledge as to whether these are wise.

    What to do

    The STAR bonds program is an “active investor” approach to economic development. Its government spending on business leads to taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

    Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

    In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Kansas and many of its cities employ: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

    In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

    There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Government spending on specific companies through programs like STAR bonds is an example of precisely the wrong policy.

    We need to move away from economic development based on this active investor approach. We need to advocate for policies at all levels of government that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to not act in most circumstances. But politicians have an irresistible urge to be seen doing something, even though most of what is done is harmful.

  • In Kansas, phony tax cut debate

    Some who oppose cutting income tax rates in Kansas are using slight of hand to make the case that Kansas can’t afford to cut taxes.

    An example comes from the Kansas Economic Progress Council. Last week this group said that the tax cut bill passed by the House of Representatives would create a budget gap of $2,475,100,000 by fiscal year 2018. KEPC then compared that to what the state general fund might be at that time — perhaps around $6,500,000,000 — and marveled at how large the deficit would be to one year’s general fund spending.

    This analysis was then picked up by groups like Kansas National Education Association (KNEA, the teachers union) and perhaps a few gullible newspaper editorial writers, and people in Kansas become concerned.

    Projections surrounding the tax plan have been shifting. But the problem with the KEPC story, and where the slight of hand comes in, is that the deficit figure cited is the cumulative deficit over a period of four (or maybe five) years. But the general fund spending this cumulative number is compared to is for a single year.

    There’s no valid basis for making this comparison. In the vernacular of the teachers union, it’s comparing apples to oranges.

    It is simply a scare tactic used by special interest groups that benefit from government spending. It’s not truthful.

    Where’s the multiplier?

    KEPC also formulated an illustration as to how many jobs the state would need to create to overcome this purported budget gap. This might be a reasonable thing to do, as the stated purpose of the tax reduction plan is to create an environment in Kansas where job creation accelerates.

    In its analysis, KEPC didn’t make use of the multiplier. This is a standard argument made by those who like KEPC want a government spending program started or expanded, or perhaps a sales tax increase. Each job created by the government spending, it is said, spawns spending that creates other jobs.

    So why didn’t KEPC use the multiplier in this analysis? Is this a technique used only when it produces the results that special interest spending groups like KEPC desire?

    On top of that, KEPC makes the same time series mistake as before, where the accumulated deficit over a period of years is treated as though it needs to be solved in one year.

  • Kansas tax reform is needed

    In Kansas, lower income tax rates are needed to ensure that Kansas has a bright economic future. Failing to reform income tax rates will mean that Kansas will continue to under-perform other states.

    Why should we care about reducing tax rates? We must remember that taxation is not a voluntary activity. Although it is not fashionable to say this in public, ultimately taxes are collected by coercion or its threat. While those who are (supposedly) enlightened will argue that taxes are like dues paid to belong to a club, or maybe the price we pay to have a civilized society, these arguments are easily dispatched. What, for example, if I don’t want to belong the the “club”? Big government — supported by high taxes — destroys civil society, if by that we mean a society based on liberty and voluntary participation and cooperation. The choice is stark, as explained in the mission statement of the Cato Institute: “In civil society individuals make choices about their lives while in a political society someone else makes or attempts to greatly influence those choices.”

    We also need to recognized the relative productivity of the public and private sectors of the economy. We find over and over that the private sector is more efficient at delivering goods and services than is the government, or public, sector. There are a number of reasons for this.

    First, government spending is filtered through the lens of special interest groups that fight to obtain every dollar they can. This “mining for dollars” is the prime reason why so much effort is spent lobbying government, both at the national, state, and local level. Almost every spending program exhibits the qualities of concentrated benefits and dispersed costs. There is a group, usually relatively small, that will benefit mightily from a spending program. The costs, however, are spread across the entire state, so the cost to each person is small. Sometimes this argument is made explicit, as when advocates for Kansas arts spending said the cost was only $0.29 per person, per year.

    This leads to an imbalance of interest and effort. The small group receiving the concentrated benefit of the spending is highly motivated to press its case and seek victory, while the average citizen sees the 29 cents — if he sees anything at all — and comes to the rational conclusion that it’s easier to pay than fight.

    Repeat this scenario many times, however, and soon the cost to the individual is substantial. This cost, remember, is to pay for spending that benefits special interest groups, and often provides little benefit to society at large. See the video Public Choice: Why Politicians Don’t Cut Spending for more. In the video, Benjamin Powell concludes: “This is the logic of politics, and this is why we end up with more spending than the average voter wants.”

    Second: Government doesn’t have the same profit motive that the private sector has. While most people want government to do some things that the private sector might not do on its own, such as caring for the sick and disabled, there a difference between government paying for a service and government providing the service. In government, spending programs are usually looked on as jobs programs. Politicians crow over how many jobs the program creates, and the more jobs, the better. In the private sector, however, different motivations come into play. There, efficiency is valued and rewarded by profit.

    Some do not recognize the beneficial effect of the profit motive, using arguments that say private for-profit companies can’t provide adequate care for disabled people. They argue that these companies will short-change patients on their care so that they can earn more profit. This, however, misunderstands how profits are earned, which is by providing a good or service which is valued by the customer, and doing that efficiently enough that something is left over after costs are paid. In competitive markets — and we must see that these exist — customers can switch to other suppliers if they don’t get what they want or contracted for. This benefits customers, which in this case, is the state in purchasing services for its citizens.

    There’s also no reason to think that government bureaucrats are immune from the profit motive. Bureaucrats benefit through expansion of the budgets and power spheres. Most seek to expand both.

    Results from other states

    While we can’t perform controlled experiments regarding states and income tax rates, we can look at what has happened in the states. There, the results are striking. Analysis in the current edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index shows that low taxes are conducive to economic growth: “When it comes to growing gross state product (GSP), the [states with no personal income tax] have, on average, outperformed those states with the highest rates by 39.2 percent over the past decade. They have also outperformed the U.S. average by 25.6 percent. Additionally, not even one state in the high tax rate group performed as well as the average no personal income tax state.”

    Besides this, low tax rates are good for government budgets, too, finds the authors of Rich States, Poor States: “You may be surprised to learn that the growth premium of the no personal income tax states also benefits the public treasury. The average growth of all state and local tax revenues over the past decade was 51 percent. Interestingly enough, the no personal income tax states saw their state revenue grow 81.7 percent faster than that of the nine highest personal income tax states. Clearly, private sector growth matters a great deal for government revenues. Leaders of states with the highest rates ought to reconsider: If the rates don’t result in more money (relative to the no personal income tax states), then why are they so high?”

    Kansas compared to other states

    In the Rich States, Poor States analysis, Kansas does not perform well. Rich States, Poor States evaluates state economies two ways. The “Economic Outlook Ranking” is a forecast looking forward. It is based on factors that are under control of the states. The “Economic Performance Ranking” is a backward-looking rating that measures state performance, again using variables under control of each state.

    For Economic Performance Ranking, Kansas is ranked 39 among the states, near the bottom in terms of positive performance. In the 2010 edition, Kansas was ranked 40th, and in 2010, 34th. Kansas is not making progress in this ranking of state performance.

    In the forward-looking Economic Outlook Ranking, Kansas ranks 26th. Again, Kansas is not making progress, compared to other states. In annual rankings since 2008 Kansas has been ranked 29, 24, 25, 27, and now 26.

    Recently the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms. The report is Location Matters: A Comparative Analysis of State Tax Costs on Business.

    The most startling fact, and one that should be a wake-up call to anyone who cares about the future of Kansas, is the uncovering by Kansas Policy Institute that not long ago, Kansas was the only state to have a loss in private sector jobs over a year-long period.

    All the spending on schools, highways, and other government programs that are supposed to spur our economy to greatness lead to this: last place. The only state with private-sector job loss. We couldn’t have done worse.

    Kansas will do better by leaving more of its citizens’ resources in the private sector, under their own control. Cutting taxes — and then government spending — is the way to generate prosperity in Kansas for all of its citizens.

  • Kansas could grow with lower taxes

    As Kansas prepares to reduce its income tax rates, there are those such as Wichita Eagle editorial board who urge caution before proceeding with reducing taxes. Others will claim that government taxation and spending are the driving forces behind growing the Kansas economy. An example is the motto of the Kansas Economic Progress Council, which is “… because a tax cut never filled a pothole, put out a fire or taught a child to read.”

    Two research papers illustrate the need to reduce taxes in Kansas, finding that high taxes are associated with reduced income and low economic growth. Research such as this rebuts the presumption of government spending advocates that reducing taxes will kill jobs in Kansas.

    One paper is The Robust Relationship between Taxes and U.S. State Income Growth by W. Robert Reed, published in the National Tax Journal in March 2008. The abstract to this paper states:

    I estimate the relationship between taxes and income growth using data from 1970 – 1999 and the forty-eight continental U.S. states. I find that taxes used to fund general expenditures are associated with significant, negative effects on income growth. This finding is generally robust across alternative variable specifications, alternative estimation procedures, alternative ways of dividing the data into “five-year” periods, and across different time periods and Bureau of Economic Analysis (BEA) regions, though state-specific estimates vary widely. I also provide an explanation for why previous research has had difficulty identifying this “robust” relationship. (emphasis added)

    In his introduction, Reed writes that previous studies had found: “To the extent a consensus exists, it is that taxes used to fund transfer payments have small, negative effects on economic activity.” His paper found a stronger relationship.

    Reed issues a caution on the use of his conclusions: “It needs to be emphasized that my claim for robustness should be understood as applying only within the context of U.S. state income growth. It should not be interpreted as being more widely applicable to other contexts, such as employment growth, manufacturing activity, plant locations, etc., or to the relationship between taxes and income growth outside the U.S.”

    This illustrates one of the ways we focus on the wrong measure of growth. Politicians focus on jobs. But to business, jobs are a cost. One of the better goals to seek, as Art Hall specifies in his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, is income growth, along with population density and population migration, productivity growth, capital investment, gross business starts and expansions, and customer service and throughput measures of state economic development agencies. Hall writes: “If Kansas performs well in the measures provided, it will also perform well in terms of job count.”

    Another example of research finding a negative impact of taxation is State Taxes and Economic Growth by Barry W. Poulson and Jules Gordon Kaplan, published in the Winter 2008 Cato Journal. In the introduction to the paper, the authors write: “The analysis reveals a significant negative impact of higher marginal tax rates on economic growth. The analysis underscores the importance of controlling for regressivity, convergence, and regional influences in isolating the effect of taxes on economic growth in the states.” (emphasis added)

    In its conclusion, the paper states:

    The analysis reveals that higher marginal tax rates had a negative impact on economic growth in the states. The analysis also shows that greater regressivity had a positive impact on economic growth. States that held the rate of growth in revenue below the rate of growth in income achieved higher rates of economic growth.

    The analysis underscores the negative impact of income taxes on economic growth in the states. Most states introduced an income tax and came to rely on the income tax as the primary source of revenue. Jurisdictions that imposed an income tax to generate a given level of revenue experienced lower rates of economic growth relative to jurisdictions that relied on alternative taxes to generate the same revenue. (emphasis added)

  • Kansans uninformed on school spending

    As the Kansas Legislature debates spending on schools, we have to hope that legislators are more knowledgeable about school spending than the average Kansan. Surveys have found that few Kansans have accurate information regarding school spending. Surprisingly, those with children in the public school system are even more likely to be uninformed regarding accurate figures. But when presented with accurate information about changes in school spending, few Kansans are willing to pay increased taxes to support more school spending.

    These are some of the findings of a 2010 survey commissioned by Kansas Policy Institute.

    Not only did Kansans underestimate school spending levels, they did so for the state portion of school funding, and again for the total of all funding sources — state, federal, and local.

    Many people greatly underestimated school funding. For all sources of funding on a per-student basis, 43% of poll respondents chose a number that is less than half the actual number.

    On a question asking about the change in Kansas school funding over the past five years, 64% thought that funding had declined. Only 6% knew that funding had increased by over 15% during that period. The five year time period is significant, as it was in 2005 that the Kansas Supreme Court ordered additional school spending as a result of the Montoy case.

    When asked about their willingness to pay higher taxes to support mores school funding, 51% said they would, if per-pupil funding was down from five years ago. But when asked whether they would pay more taxes in per-pupil funding had gone up by over 20%, only 11% said yes. According to the Kansas State Department of Education, total funding per pupil increased by 26% over this period.

    The survey was conducted by The Research Partnership, Inc., a Wichita-based market research firm. The complete results may be viewed at the Kansas Reporter website at K-12 Public Opinion Survey, or here.

    Survey participants were asked if they would like to make comments regarding funding of Kansas public schools. There are 17 pages of these comments.

    Analysis

    The results of this Kansas poll are similar to recent nationwide results discovered by EducationNext, a project of the Harvard Kennedy School of Government. That study is summarized at Americans uninformed about school spending, study finds. Another study with similar findings is at Kansas school spending: citizens again are uninformed.

    It’s not surprising that Kansans are misinformed about the level of school spending and its changes. Even members of the Kansas House of Representatives and the Wichita School Board are sometimes uninformed, misinformed. It’s either that or we have to conclude they are lying to us.

    The school spending lobby in Kansas focuses on only one measure of school spending, base state aid per pupil. That number is approximately one-third of total school spending, and it has declined. As this study shows, it is in the best interests of the Kansas school establishment for average Kansans to be uninformed about the true levels of school spending. When presented with accurate information about school spending, Kansans are not willing to pay higher taxes.

    We can understand the motivation of schools to lobby for increased spending. But they should be truthful. It’s even worse when newspaper editorial writers don’t recognize the truth. An example is a recent Wichita Eagle editorial written by Rhonda Holman. She repeated the meme of the school spending lobby, writing: “… despite state per-pupil base aid having been slashed to 1999 levels.” Most people don’t know that “base aid” is only one component of Kansas school spending. It’s the starting point for the Kansas school finance formula. After weightings are applied, most school districts receive much more funding than the base aid figure. The Wichita school district, for example, received $6,511 per pupil from the state at a time when base state aid was $4,012. Also, look at the total spending picture: From 1999 to last year, Wichita school spending jumped from $336 million to over $604 million. State aid to this district increased from $200 million to $328 million over the same time.

    It’s also likely that the current school year will see record spending on schools in Kansas.

    So why don’t Holman and the Wichita Eagle use the total spending figures, or even the total state aid numbers? Focusing on one component of Kansas school finance that is not representative of the entire picture is a disservice to Wichita Eagle readers.

  • Kansas state spending is not, itself, a good

    In the debate over reducing and eventually eliminating the income tax in Kansas, those who oppose income tax reduction say it will simply shift the burden of taxation to others, in the form of sales and property taxes. This is true only if we decide to keep spending at the same rate. We could cut spending in response to reduced revenue, but it is argued that state spending is a good thing, a source of wealth that Kansas should continue to rely on.

    The idea that government spending is a generator of wealth and prosperity is true only beyond a certain minimal level of spending. We benefit from government provision of things like national defense, public safety, and a court system. (There are those who believe that even these could be provided by the private sector rather than markets.) But once government grows beyond these minimal core functions, it is virtually certain that markets — that is, free people trading in the private sector — can produce a wider variety of better goods and services at lower cost.

    We also have to realize that government spending has a cost that must be paid for. Advocates of government spending point to the salary paid to a government worker and how that money gets spent in the economy, producing jobs. These advocates, however, do not recognize the source of the worker’s salary, which is money taken from someone through taxation (or borrowing and inflation at the federal level). The loss of that money to government has a cost in the form of the reduced economic activity of those who paid the taxes.

    If this loss was economically equivalent to the gain, we might be unconcerned. But there is a huge cost in taxation and government inefficiency that makes government spending a negative-sum proposition.

    Another fundamental problem with government taxation and spending is that it is not voluntary. In markets, people voluntarily trade with each other because they feel it will make them better off. That’s not the case with government. I do not pay my taxes because I feel doing so makes me better off, other than for that small part that goes to the basic core functions. Instead, I pay my taxes so that I can stay out of jail. This fundamentally coercive nature of government spending gets it off to a bad start.

    Then, ask how that money is spent. Who decides, and how? Jeffrey A. Miron explains: “The political process, alas, does not lend itself to objective balancing of costs and benefits. Most programs benefit well-defined interest groups (the elderly, teachers unions, environmentalists, defense contractors) while imposing relatively small costs per person on everyone else. Thus the winners from excess spending fight harder than the losers, and spending far exceeds the level suggested by cost-benefit considerations.” (Slash Expenditure to Balance the Budget)

    An example in Kansas is the special interest group that benefits from highway construction. They formed a group called Economic Lifelines. It says it was formed to “provide the grassroots support for Comprehensive Transportation Programs in Kansas.” Its motto is “Stimulating economic vitality through leadership in infrastructure development.”

    A look at the membership role, however, lets us know whose economic roots are being stimulated. Membership is stocked with names like AFL-CIO, Foley Equipment Company, Heavy Constructors Association of Greater Kansas City, Kansas Aggregate & Concrete Associations, Kansas Asphalt Pavement Association, Kansas Contractors Association, Kansas Society of Professional Engineers, and PCA South Central Cement Promotion Association. Groups and companies like these have an economic interest in building more roads and highways, whether or not the state actually needs them. And although there is a 10-year, $8 billion spending program in place, this group is fighting a proposal to divert $24 million to other programs.

    As Miron explained, groups like this will spend almost unlimited money in order to receive appropriations from the government. It’s easier than competing in markets, and that’s a big problem with government spending — decision are made by the centralized few, not the many dispersed actors in markets.

    Some argue that without government spending, certain types of goods and services will not be provided. A commonly cited example is education, which accounts for about half of Kansas general fund spending. Would there be schools if not for government? Of course there would be. There are many non-government schools now, even though those who patronize them must first pay for the government schools before paying for their own schools. And there were many schools and educated, literate Americans before government decided it need to monopolize education.

    Still, it is argued that government spending on education is needed because everyone benefits from an educated citizenry. Tom G. Palmer explains: “Thus, widespread education generates public benefits beyond the benefits to the persons who are educated, allegedly justifying state provision and financing through general tax revenues. But despite the benefits to others, which may be great or small, the benefits to the persons educated are so great for them that they induce sufficient investment in education. Public benefits don’t always generate the defection of free-riders.”

    Those who still argue that government spending in education is for the good of everyone will also need to defend the sagging and declining performance of public schools, persuading us that government schools are producing an educated citizenry. They also need to defend the capture of Kansas spending on schools by special interest groups that benefit from this spending.

    Back to the basics: Government spending as economic booster is the theory of the Keynesians, including the administration of Barack Obama. Miron, from the same article cited above, explains the problems with this:

    That brings us to the second argument for higher spending: the Keynesian claim that spending stimulates the economy. If this is accurate, it might seem the U.S. should continue its high-spending ways until the recession is over.

    But the Keynesian argument for spending is also problematic. To begin with, the Keynesian view implies that any spending — whether for vital infrastructure or bridges to nowhere — is equally good at stimulating the economy. This might be true in the short term (emphasis on might), but it cannot be true over the long haul, and many “temporary” programs last for decades. So stimulus spending should be for good projects, not “digging ditches,” yet the number of good projects is small given how much is already being spent.

    More broadly, the Keynesian model of the economy relies on strong assumptions, so we should not embrace it without empirical confirmation. In fact, economists find weak or contradictory evidence that higher government spending spurs the economy.

    Substantial research, however, does find that tax cuts stimulate the economy and that fiscal adjustments — attempts to reduce deficits by raising taxes or lowering expenditure — work better when they focus on tax cuts. This does not fit the Keynesian view, but it makes perfect sense given that high taxes and ill-justified spending make the economy less productive.

    The implication is that the U.S. may not face a tradeoff between shrinking the deficit and fighting the recession: it can do both by cutting wasteful spending (Medicare, Social Security, and the wars in Iraq and Afghanistan, for starters) and by cutting taxes.

    The reduced spending will make the economy more productive by scaling government back to appropriate levels. Lower tax rates will stimulate in the short run by improving consumer and firm liquidity, and they will enhance economic growth in the long run by improving the incentives to work, save, and invest.

    Deficits will therefore shrink and the economy will boom. The rest of the world will gladly hold our debt. The U.S. will re-emerge as a beacon of small government and robust capitalism, so foreign investment (and talented people, if immigration policy allows) will come flooding in.

    In Kansas, we need to scale back government to appropriate levels, as Miron recommends. That means cutting spending, as that is the measure of the size of government. That will allow us to cut tax rates, starting with the income tax. Then we in Kansas can start to correct the long record of sub-par economic performance compared to other states and bring prosperity and jobs here.

  • In Kansas, tax reform is about job creation

    As explained in the new edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, tax policy is vitally important to a state’s economic competitiveness. Unfortunately, Kansas does not perform well against other states.

    Two groups working to create a more competitive economic environment in Kansas are Americans for Prosperity, Kansas and Kansas Policy Institute. Their video commercial from earlier this year that explains the urgent situation in Kansas is below.