Tag: Government spending

  • In Kansas, there are ways to reduce the cost of government

    Recently-passed tax reform in Kansas has lead to fear that the state will suffer large deficits in upcoming years and will have to cut services like education and social services. There are many ways, however, that Kansas government can save money and still provide the essential services that Kansans rely on. One way is to improve the budgeting process.

    Something else Kansas needs to do is improve the operations and reduce the cost of state government. In 2011 the Kansas Legislature lost three opportunities to do just this. Three bills, each with this goal, were passed by the House of Representatives, but each failed to pass through the Senate, or had its contents stripped and replaced with different legislation.

    Each of these bills represents a lost opportunity for state government services to be streamlined, delivered more efficiently, or measured and managed. These goals, while always important, are now essential for the success of Kansas government and the state’s economy.

    Kansas Streamlining Government Act

    HB 2120, according to its supplemental note, “would establish the Kansas Streamlining Government Act, which would have the purpose of improving the performance, efficiency, and operations of state government by reviewing certain state agencies, programs, boards, and commissions.” Fee-funded agencies — examples include Kansas dental board and Kansas real estate commission — would be exempt from this bill.

    In more detail, the text of the bill explains: “The purposes of the Kansas streamlining government act are to improve the performance, streamline the operations, improve the effectiveness and efficiency, and reduce the operating costs of the executive branch of state government by reviewing state programs, policies, processes, original positions, staffing levels, agencies, boards and commissions, identifying those that should be eliminated, combined, reorganized, downsized or otherwise altered, and recommending proposed executive reorganization orders, executive orders, legislation, rules and regulations, or other actions to accomplish such changes and achieve such results.”

    In testimony in support of this legislation, Dave Trabert, President of Kansas Policy Institute offered testimony that echoed findings of the public choice school of economics and politics: “Some people may view a particular expenditure as unnecessary to the fulfillment of a program’s or an agency’s primary mission while others may see it as essential. Absent an independent review, we are expecting government employees to put their own self-interests aside and make completely unbiased decisions on how best to spend taxpayer funds. It’s not that government employees are intentionally wasteful; it’s that they are human beings and setting self-interests aside is challenge we all face.”

    The bill passed the House of Representatives by a vote of 79 to 40. It was referred to the Senate Committee on Federal and State Affairs, where it did not advance.

    Privatization and public-private partnerships

    Another bill that did not advance was HB 2194, which in its original form would have created the Kansas Advisory Council on Privatization and Public-Private Partnerships.

    According to the supplemental note for the bill, “The purpose of the Council would be to ensure that certain state agencies, including the Board of Regents and postsecondary educational institutions, would: 1) focus on the core mission and provide goods and services efficiently and effectively; 2) develop a process to analyze opportunities to improve efficiency, cost-effectiveness and provide quality services, operations, functions, and activities; and 3) evaluate for feasibility, cost-effectiveness, and efficiency opportunities that could be outsourced. Excluded from the state agencies covered by the bill would be any entity not receiving State General Fund or federal funds appropriation.”

    This bill passed by a vote of 68 to 51 in the House of Representatives. It did not advance in the Senate, falling victim to a “gut-and-go” maneuver where its contents were replaced with legislation on an entirely different topic.

    Opposing this bill was Kansas Organization of State Employees (KOSE), a union for executive branch state employees. It advised its “brothers and sisters” that the bill “… establishes a partisan commission of big-business interests to privatize state services putting a wolf in charge of the hen house. To be clear, this bill allows for future privatization of nearly all services provided by state workers. Make no mistake, this proposal is a privatization scheme that will begin the process of outsourcing our work to private contractors. Under a privatization scheme for any state agency or service, the employees involved will lose their rights under our MOA and will be forced to adhere to the whims of a private contractor who typically provides less pay and poor benefits. Most workers affected by privatization schemes are not guaranteed to keep their jobs once an agency or service is outsourced.”

    Note the use of “outsourcing our work.” This underscores the sense of entitlement of many government workers: It is not work done for the benefit of Kansans; to them it is our work.

    Then, there’s the warning that private industry pays less. Most of the time representatives of state workers like KOSE make the case that it is they who are underpaid, but here the argument is turned around when it supports the case they want to make. One thing is probably true: Benefits — at least pension plans — may be lower in the private sector. But we’re now painfully aware that state government has promised its workers more pension benefits than the state has been willing to fund.

    Performance measures

    Another bill that didn’t pass the entire legislature was HB 2158, which would have created performance measures for state agencies and reported that information to the public. The supplemental note says that the bill “as amended, would institute a new process for modifying current performance measures and establishing new standardized performance measures to be used by all state agencies in support of the annual budget requests. State agencies would be required to consult with representatives of the Director of the Budget and the Legislative Research Department to modify each agency’s current performance measures, to standardize such performance measures, and to utilize best practices in all state agencies.” Results of the performance measures would be posted on a public website.

    This bill passed the House of Representatives by a nearly unanimous vote of 119 to 2, with Wichita’s Nile Dillmore and Geraldine Flaharty the two nay votes. In the Senate, this bill was stripped of its content using the “gut-and-go” procedure and did not proceed intact to a vote.

    Opposition to these bills from Democrats often included remarks on the irony of those who were recently elected on the promise of shrinking government now proposing to enlarge government through the creation of these commissions and councils. These bills, however, proposed to spend modest amounts increasing the manageability of government, not the actual range and scope of government itself. As it turns out, many in the legislature — this includes Senate Republicans who initiated or went along with the legislative maneuvers that killed these bills — are happy with the operations of state government remaining in the shadows.

    These proposals to scale back the services that government provides — or to have existing services be delivered by the private sector — mean that there will be fewer government employees, and fewer members of government worker unions. This is another fertile area of gathering support for killing these bills.

    State workers and their supporters also argue that fewer state workers mean fewer people paying state and other taxes. Forgotten by them is the fact that the taxes taken to pay these workers means less economic activity and fewer jobs in the private sector. And, in fact, Kansas has seen the number of government workers — at all levels — rise.

    As to not wanting performance measures: Supporters of the status quo say that people outside of government don’t understand how to make the decisions that government workers make. In one sense, this may be true. In the private sector, profitability is the benchmark of success. Government has no comparable measure when it decides to, say, spend some $300 million to renovate the Kansas Capitol. But once it decides to do so, the benchmark and measurement of profitability in executing the service can be utilized by private sector operators. Of course, private contractors will be subject to the discipline of the profit and loss system, something again missing from government.

  • Farm bill contains energy spending

    The Obama Administration’s politically-driven energy spending (think Solyndra) has illustrated for Americans that government should not be in the business of selecting and subsidizing energy sources. But the farm bill currently under consideration contains more of this wasteful spending. The bill has advanced from a Senate committee.

    According to the Congressional Budget Office, the “Energy Title” (the section of the bill that addresses energy) will result in additional spending of $780 million over the next ten years, with $550 million of that in the first five years. This additional spending is over the “baseline” spending. Total spending on energy in the farm bill would be $1.5 billion over ten years.

    One of the programs in the farm bill is Biomass Crop Assistance Program (BCAP), which, according to the USDA, “provides financial assistance to owners and operators of agricultural and non-industrial private forest land who wish to establish, produce, and deliver biomass feedstocks.” In other words, it pays farmers to grow and deliver crops. This program was cited by the USDA Inspector General for problems including improper payments and administration problems.

    Another energy-related program in the farm bill is Biorefinery Assistance Program (BAP). This program has had its share of failures along the lines of Solyndra. Range Fuels, for example, was formed to produce cellulosic ethanol. It received a $76 million grant from the Department of Energy (during the Bush Administration), and later a $80 million loan under BAP during the Obama Administration. The plant produced one batch of methanol — not the type of alcohol that cars use as fuel — and then shut down. For more, see the Wall Street Journal The Range Fuels Fiasco: A case study in the folly of politically directed investment.

    There’s also the Rural Energy for America Program, which provides loan guarantees and grants for rural America to install renewable energy systems such as wind and solar power, as well as more exotic technologies like geothermal.

    There’s other energy-related spending in the bill, but you get the idea. Some of this spending is government choosing winners and losers in the energy marketplace, rather than letting markets work out which technologies are worthwhile investment subjects. Some of it is simply welfare spending on special interest groups. This energy-related spending is happening where you might not think to look for it: the farm bill. (The total cost of the farm bill over ten years is estimated by the CBO to be $969 billion.)

    There’s other spending on biofuels that’s not in the farm bill. Last year a cellulosic ethanol plant in western Kansas received a $132 million loan guarantee. All this spending is in spite of the fact that there has been no commercial-scale cellulosic ethanol production.

    Spending on these rural energy programs provides an opportunity for politicians to engage in what U.S. Representative Mike Pompeo has termed “photo-op economics.” Those who have fought for these spending programs get to participate in groundbreaking ceremonies and other highly visible new events. The lobbyists who fight for them earn large fees. But this type of spending represents cronyism at its fullest, where the public at large is taxed to provide benefits for the few. We need to end this type of spending, whether it be hidden in the farm bill or elsewhere.

  • Reducing Kansas taxes and government footprint

    Across Kansas editorial writers and candidates for state offices are harshly criticizing the new tax policy passed this year. Editorials with titles like “Tax cut is huge gamble” predict doom and gloom for our state. But we’ve been in the doldrums in Kansas, and reducing taxes is a good first step on the road to recovery for many reasons.

    The most fundamental reason we need to reduces taxes in Kansas is that the money people earn belongs first to themselves, not the government. Not everyone believes this. You can tell these people when they talk about the cost of a tax cut. An example is a recent op-ed by KU political science professor Burdett Loomis, when he wrote “We will, however, discover the public costs to disbursing these private benefits.” The political class believes the current level of taxation belongs to them, and any reduction in tax revenue is a cost to government.

    The correct view is that government is a cost to taxpayers. Reducing that cost leaves more money in the pockets of people, where it belongs. Reducing taxes is the correct thing to do for this reason.

    Another reason to reduce taxes is that it leaves more money in the hands of the private sector. Examples of government waste, fraud, and abuse are everywhere. No one spends money as carefully as their own, so leaving money in the private sector almost guarantees the money will be spent or invested more wisely than sending it to government to spend.

    As far as the prediction of drastic cuts in services or the shifting of costs to local property taxes, Kansas Policy Institute has shown that reducing state spending by 6.5 percent in 2013 — and then working to control the rate of increase — will result in a balanced budget. Who doesn’t believe that government can cut spending by that amount and still provide essential services? Kansas employs no budgeting methodologies that have been shown to root out wasteful and unneeded spending. Two examples are zero-based and priority-based budgeting.

    Some complain that there is no evidence that cutting taxes will spur economic growth and job creation. An example is from the Loomis op-ed: “There is simply no evidence, nor any studies, to suggest that tax reductions alone can ever generate this kind of economic growth, much of it untaxed.” (Note the lament that the growth won’t be fully taxed.)

    We don’t have to look hard to find evidence that low taxes work. We can’t perform controlled experiments regarding states and income tax rates, but 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.”

    We also need to face the grim realization that the Kansas economy has not been performing 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.

    You might think that this evidence would matter to those who care about the future of Kansas. Judging from the flurry of opposing editorials the last month, it doesn’t seem to have an impact.

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

  • Brownback on wind, again

    This week Kansas Governor Sam Brownback again made the case for government spending on a particular industry. The industry is wind power, and the governor made his remarks at a national conference of the wind industry.

    The wind industry, with Brownback’s support, wants to extend the production tax credit (PTC) for the production of electrical power by wind. In March Brownback and U.S. Senator Jerry Moran of Kansas wrote an op-ed making the case for extending the PTC. At the conference this week, Brownback called for extending the PTC, although he did support a four-year phaseout.

    The PTC pays generators of wind power 2.2 cents per kilowatt-hour produced. To place that in context, a typical Westar customer in Kansas that uses 1,000 kilowatt-hours in the summer pays $95.22 (before local sales tax), for a rate of 9.5 cents per kilowatt-hour. (This is the total cost including energy charge, fuel charge, transmission charge, environment cost recovery rider, property tax surcharge, and franchise fee, according to a March 2010 illustration provided by Westar.) So 2.2 cents is a high rate of subsidy for a product that sells for 9.5 cents.

    Brownback and Moran contend that the PTC is necessary to let the wind power industry “complete its transformation from being a high tech startup to becoming cost competitive in the energy marketplace.” The problem with this line of argument is that wind is not an industry in its infancy. The PTC has been in place since 1992, a period of twenty years. If an industry can’t get established in that period, when will it be ready to stand in its own?

    The authors also contend that canceling the PTC is, in effect, a “tax hike on wind energy companies.” To some extent this is true — but only because the industry has enjoyed preferential tax treatment that it should never have received, coupled with a misunderstanding of the tax credit mechanism.

    The proper way to view the PTC is as a government spending program. That’s the true economic effect of tax credits. Only recently are Americans coming to realize this, and as a result, the term “tax expenditures” is coming into use to accurately characterize the mechanism of tax credits.

    Amazingly, Brownback and Moran do not realize this, at least if we take them at their written word when they write: “But the wind PTC is a winning solution because it allows companies to keep more of their own dollars in exchange for the production of energy. These are not cash handouts; they are reductions in taxes that help cover the cost of doing business.” (Emphasis added.)

    It is the mixing of spending programs with taxation that leads these politicians to wrongly claim that tax credits are not cash handouts. Fortunately, not everyone falls for this seductive trap. In an excellent article on the topic that appeared in Cato Institute’s Regulation magazine, Edward D. Kleinbard explains:

    Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. Like any other form of deficit spending, a targeted tax break without a revenue offset simply means more deficits (and ultimately more taxes); a targeted tax break coupled with a specific revenue “payfor” means that one group of Americans is required to pay (in the form of higher taxes) for a subsidy to be delivered to others through the mechanism of the tax system. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

    U.S. Representative Mike Pompeo of Wichita recognized the cost of paying for tax credit expenditures when he recently wrote: “Moreover, what about the jobs lost because everyone else’s taxes went up to pay for the subsidy and to pay for the high utility bills from wind-powered energy? There will be no ribbon-cuttings for those out-of-work families.” See Mike Pompeo: We need capitalism, not cronyism.

    So when Brownback and Moran write of the loss of income to those who profit from wind power, we should remember that these profits do not arise from transactions between willing partners. Instead, they result from politicians like these who are willing to override the judgment of free people and free markets with their own political preferences — along with looking out for the parochial interests of the home state. We need less of this type of wind power.

  • 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.

  • 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)

  • Pompeo: Ending tax credits for energy doesn’t violate pledge

    In a news conference last week, U.S. Representative Mike Pompeo of Wichita and two others criticized President Barack Obama for misunderstanding of the meaning of a taxpayer protection pledge that Pompeo has signed.

    The pledge is the famous pledge advanced by Grover Norquist of Americans for Tax Reform, where signers pledge not to increase taxes. The “tax increase” the president refers to are various tax credits that benefit some forms of energy production, particularly wind and solar power. Norquist, along with Senator Jim DeMint of South Carolina, participated in the conference.

    Pompeo said the president “called out” those who signed the ATR pledge, specifically arguing that allowing the wind production tax credit (PTC) to expire would be a violation of the pledge. The ATR taxpayer protection pledge is to “One, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and two, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

    Pompeo has introduced legislation in the House of Representatives that would end tax credits on all forms of energy production. By itself, that might be a violation of the pledge. The bill, however, specifies that the savings from the elimination of the spending on tax credits would be used to lower the corporate income tax rate. The use of the savings to reduce tax rates is in agreement with the second plank of the ATR pledge.

    Pompeo’s bill is H.R. 3308: Energy Freedom and Economic Prosperity Act. This bill is currently in committee. Sen. DeMint introduced an amendment to a Senate bill that would have accomplished the same, but the amendment received only 26 votes. Pompeo characterized this as an advance, as just a few years ago, he said such a bill or amendment would have received only a few votes. But this received the votes of a majority of Republican members of the Senate, including that of minority leader Mitch McConnell.

    In his remarks, DeMint said that while the president talks about eliminating corporate loopholes, he is hypocritical in his criticism of this legislation. If Congress could eliminate the tax credits — loopholes — for big oil and all energy and lower tax rates for all, it would be “a model for what we could do across our whole tax code.”

    Norquist emphasized the temporary nature of many loopholes or tax advantaged treatment added to the tax code. These are usually pitched as temporary measures, needed because the policy goal is good, the industry is in its infancy, and it needs temporary help. But as in the case of the wind PTC, these special advantages are often extended or made permanent.

    The issue of special tax treatment for the oil and gas industry arose. Norquist said that these tax considerations almost always fall into the categories of depreciation and expensing, which are available to all industries. He said if these are available to General Electric and Wal-Mart, they should also be available to all industries, including oil and gas.

    Not everyone, including all conservatives, agree that tax credits are a form of spending implemented through the tax code. Recently Kansas Governor Sam Brownback and U.S. Senator Jerry Moran of Kansas made the case for extending the production tax credit for the production of electrical power by wind. See Wind tax credits are government spending in disguise.

    In their op-ed, the Kansans argued the PTC is necessary to let the wind power industry “complete its transformation from being a high tech startup to becoming cost competitive in the energy marketplace.” As the PTC has been in effect is 1992, a period of 20 years, Norquist’s warning about the temporary nature of these programs is relevant.

    The proper way to view the PTC is as a government spending program, recognizing the true economic effect of tax credits. Only recently are Americans coming to realize this, and as a result, the term “tax expenditures” is coming into use to accurately characterize the mechanism of tax credits. Canceling this spending is what would let tax rates be reduced, according to Pompeo’s proposed legislation.

    Amazingly, Brownback and Moran do not realize this, at least if we take them at their written word when they write: “But the wind PTC is a winning solution because it allows companies to keep more of their own dollars in exchange for the production of energy. These are not cash handouts; they are reductions in taxes that help cover the cost of doing business.” (Emphasis added.)