Tag Archives: income distribution

The Kansas Red State Experiment is Failing: Drastic Tax Cuts Have Not Led to Higher Employment Growth

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State Employment Growth Relative to US, Kansas and others, Jan 2011 to Aug 2014

A.  Introduction

Republican Sam Brownback was elected governor of Kansas in 2010 and is now running for re-election.  An extreme Tea Party conservative, he has pursued a radically right-wing agenda in Kansas with little constraint from a Republican controlled state legislature (especially after he led a successful effort to purge relative moderates from his party by more extreme conservatives in the 2012 primaries).

Central to his program were drastic tax cuts enacted in 2012, with a further round of cuts in 2013.  They were one of the largest tax cuts ever enacted by a state in percentage terms, and were labeled by Brownback to be a “real live experiment” of the conservative vision of small government leading to fast growth.  The tax cuts would be like a “shot of adrenaline into the heart of the Kansas economy” he asserted, employment would boom, and the faster growth would lead to greater total tax revenues generated (despite the lower rates) due to a then larger economy.

But it has not happened.  Employment in Kansas has fallen relative to the rest of the US since Brownback took office.  This post will first describe in more detail the tax cut measures, and will then look at the impact on employment.

B.  The Brownback Tax Cuts

The tax cut measures have (so far) come in two major waves.  The first were passed in early 2012 and signed into law by Brownback in May 2012.  The second were passed and signed in mid 2013.  The first were the more important, and included:

a)  Cuts in personal income tax rates, especially for those in the higher brackets:

Income Bracket Old Rate New Rate % change
>$60,000 6.45% 4.90% -24.0%
$30,000 – $60,000 6.25% 4.90% -21.6%
<$30,000 3.50% 3.00% -14.3%

b)  Elimination of state business taxes for most companies in Kansas.  This covered over 200,000 firms in the state, and while purportedly aimed only to benefit small businesses, the definition included at least several of the subsidiaries of Koch Industries (owned by the multi-billionaire Koch brothers, which is based in Kansas and which has provided strong financial support to the campaigns of Brownback and other Tea Party favorites).  No other state has eliminated such taxes.

c)  And partially offsetting the personal income tax cuts, the state sales tax rate was raised.  Such a tax increase affects the poorest the most.

Tax rates were then cut further in 2013.  Among other measures, the rate for the top personal income tax bracket is being phased down from the 4.9% of the 2012 law to just 3.9% by 2018, a cut of over 20%.

The Institute on Taxation & Economic Policy along with the Center on Budget and Policy Priorities has calculated the impact of these tax changes by household income category.  They are hugely regressive.  The figure below (calculated from the ITEP and CBPP figures) shows the impact as a percentage of taxes previously due.  While the combined effect of the tax changes will lead to a 37% reduction in taxes due for the richest 1% in Kansas (whose average household income in 2010 was $1.025 million), the poorest 20% have seen their taxes go up by 14%:

Impact of Kansas 2012 and 2013 Tax Cuts by Income Category

And the regressive tax cuts came on top of a system that already taxes the poor more than the rich.  The poorest 20% will now be paying close to 11% of their income in state and local taxes in Kansas.  Those in the middle (between the 20th to the 80th percentiles) will be paying between 8 and 9%.  But the richest 1% will be paying less than 4%.

The tax cuts have not, however, led to an increase in government revenues.  As will be discussed below, employment has not gone up as a result of the cuts.  Rather, tax cuts have led to cuts in tax revenues received.  While most of us would find this not at all surprising, Brownback was advised by Arthur Laffer, famous for the so-called Laffer Curve, which posits that tax cuts will lead to such an increase in employment and income that tax revenues will rise despite the lower rates.  It has not happened.

A recent report from the Rockefeller Institute of Government found that state tax revenues in Kansas between the second quarter (April to June) of 2013 and the second quarter of 2014 fell by 22% in total, and fell by 43% for the state personal income tax only.  These reductions were larger than in any of the other 50 states.  The 2012 tax cuts went into effect as of January 1, 2013, and the taxes collected in the second quarter of that year will then mostly reflect what was due on incomes earned in 2012.  The reduction in revenues due and collected in the second quarter of 2014 (primarily on incomes earned in 2013) will then represent the first year impact of the 2012 law.

The reduction in tax revenues generated as a consequence of the sharp tax rate cuts should surprise few.  The non-partisan Legislative Research Department of the Kansas state legislature has estimated that, as a consequence of the tax cuts, state revenues will fall by an estimated $730 million in FY14, and by a cumulative $5.2 billion by FY18.  These are large amounts for a small state.  The predictable result has been sharp cuts in the government budget.  Much of this has been borne by education, which is close to inevitable simply because it constitutes such a large share of the state budget.  State funding for K to 12 education has been cut by over 15% during Brownback’s term in office, and he has proposed another 2% cut for FY2015.

Despite such expenditure cuts, the state budgetary situation is now precarious.  This has led to cuts in Kansas government bond ratings by Moody’s and S&P.  It will now be more expensive for Kansas to borrow for public investment and other needs.

C.  Impact on Kansas Employment

Governor Brownback claimed that the massive tax cuts would lead to a boom in Kansas employment.  The chart at the top of this post shows that relative to the United States as a whole, as well as relative to such Democratically controlled states as Colorado, California, Minnesota, and Massachusetts, Kansas has lagged since Brownback was inaugurated (in January 2011).  The data is from the Bureau of Labor Statistics.  The states chosen reflect two near-by states to Kansas with important agricultural sectors and with also Democratic control of the state political machinery (Democratic governors as well as Democratic majorities in both chambers of the state legislatures:  Colorado and Minnesota), and two normally Democratic states from the two coasts who are often charged as having especially high state tax rates (California and Massachusetts)

The chart shows what has happened to employment in each state expressed as a share of total US employment, normalized so that the January 2011 shares are all set to 100.  Thus it will show whether employment in the state grew at a faster, or a slower, pace than overall employment in the US.  The share will go up if employment in the state grows at a faster pace than in the US as a whole, and the share will go down if employment in the state grows more slowly.

Kansas has not performed well.  Its share in US employment has fallen, and more or less consistently fallen, since Brownback took office.  There is no indication that the massive tax cuts, passed into law in May 2012 and expected well before, have led to employers shifting to the state or expanding there.  In contrast, the Blue States of Colorado and California have done especially well, while the Blue States of Minnesota and Massachusetts have seen employment grow at roughly the same pace as the US as a whole.

D.  What This Does and Does Not Say

There is thus no evidence that the massive tax cuts Brownback was able to have enacted have led to the boom in employment he asserted would follow.  It was not a “shot of adrenaline into the heart”, as he asserted it would be.  But it is also important to be clear on what the evidence we have so far does not say:

a)  First, while there is no evidence that the tax cuts led to a boom in employment, there is also no clear evidence that the tax cuts led (at least so far) to major reductions in employment.  Rather, employment in Kansas has trended steadily downwards over this period relative to the rest of the country, with the tax cuts having little effect one way or the other.  State level employment depends on many things, and the state tax regime does not appear to be a terribly important one.  What matters more will likely be state structural issues, such as the mix of particular industries in the state (including agriculture), the age distribution of the population in the state, the mix of high skilled vs. low skilled workers in the state, and so on.

b)  While Kansas performed poorly relative to the other states depicted in the chart above, there were fifteen states that did even more poorly than Kansas over this period.  Overall US employment grew by 6.4% over this period as a whole (1.75% at an annualized rate), while employment in Kansas grew by only 3.7% (1.0% annualized).  But of the 50 states, employment growth was worst in Alaska, with growth of only 1.6% over the period (0.4% annualized).  As noted above, state specific structural issues will matter.

c)  Finally, one should recognize that the period so far has been short.  While Brownback can clearly no longer claim that there will be an immediate or even near-term positive impact on employment, he is (not surprisingly) now claiming that it will take more time.  One can of course not disprove this until more time has passed, but the question is how long does one need before one recognizes the failure.  But we do know that the tax cuts have devastated state finances, leading to the rating downgrades and to budget cuts that are slashing expenditures in important areas such as education.  There is good reason to expect that such cuts in education will have adverse impacts on employment in the longer term.  When the current generation of students graduate, a larger share will not have the level of skills required for good jobs, if any jobs.  Potential employers will shun a state where they cannot hire staff with the skills they need.  I would wager that the long term impact will be negative, not positive.

But what one can say now with confidence is that the evidence is clear that massive tax cuts of this Red State “experiment” have not led to a near term boom in jobs.  It is also clear that such tax cuts do lead to cuts, not increases, in tax revenues.  The experiment has failed to fulfill the claims originally set out for it.

At One Time, You Could Work Your Way Through College – But Not Any More.

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Earnings from Min Wage vs. University Costs, 1963-2013

 

At one time, not that long ago, a student could work at a minimum wage job over the summers and during holidays, and be able to cover the total cost (including room and board) of attending a four-year state university.  That is now far from possible.

With students now returning to school, it is perhaps a good time to look at what has happened to the affordability of college in recent decades for middle class families.  The chart above provides one indicator.  It compares what a student could earn in a summer job at the minimum wage, or in year-round work at the minimum wage while attending school (i.e. during summers, holidays, and part time during the academic term), as a ratio to what it would cost to attend a four-year state university.

The state university costs are for in-state tuition and required fees, plus the cost of on-campus room and board.  The figures are from the National Center for Education Statistics of the US Department of Education (with figures for 2013 calculated based on the 2012 to 2013 growth in the College Board estimates).  The university cost figures are for four-year, degree granting, state colleges and universities (i.e. they do not include two-year community colleges), and cover all such state schools.  The cost of attending the elite state schools (such as Berkeley, UVA, or the University of Michigan) would be more.  The years shown on the chart are for the beginning of the respective academic years (i.e. 2013 is for the 2013/14 academic year), and the minimum wage rate used is that which was in effect in July of that year.

The chart indicates that one could have covered the cost of attending a state university in the 1960s and 70s solely through minimum wage work.  Based on just a 17 week summer break, one would have earned enough to cover an average of 82% of the full cost of attending school.  An industrious student working full time over the summer and during vacation breaks (such as Christmas), plus 10 hours per week during the academic term, would have been able to cover the full cost and more – an average of 143% of the cost of school.  Hence summer work plus a bit more during vacations would have sufficed to cover the full cost of college.  In terms of dollar figures, the full cost of attending a state university in 1963/64 would have been $929, in the then current dollars.  A student could have earned $782 just from working at minimum wage over the summer, or $1,357 by working at minimum wage over the summer, during vacations, and 10 hours per week during the academic term.

These are, of course, just simple indicators.  One might have been able to earn more than the minimum wage, and/or worked a different number of hours.  But the point is that in the 1960s and 70s, when baby boomers such as myself were going to college, it was possible for the student alone, simply by working at the minimum wage, to have paid for the full cost of attending a four-year state university.

That began to change in the 1980s, as Reagan took office.  The change is indeed striking.  Affordability then began to fall, and it has fallen steadily since, as seen in the chart above.  By 1986, a student working even full time over the summer and during vacation breaks, and 10 hours a week during the academic term, no longer would have been able to cover the full cost of attending school.

The share of schooling costs that could be covered by work then continued to decline (with some bumps up when the minimum wage was sporadically changed) until the present day.  By 2013, summer work would only cover a quarter of the cost of schooling, while more comprehensive work over the entire year would only cover less than half.  In dollar terms, the average cost of attending a state university (for tuition, room, and board) was $18,037 per year in 2013.  But a student working over the summer at the minimum wage would have only been able to earn $4,930, or only a bit over a quarter of the cost of attending school.  Working full time over the summer and during vacations, plus 10 hours per week during the academic term, the student could have only earned $8,555, or less than half the cost of attending school.

As a consequence, students must now rely on their parents (when their parents can afford it), or a scarce number of scholarships (highly limited, especially for state schools), or on student loans.  Otherwise, they must give up on attending university.

The result has been an explosion in student loan debt outstanding.  As of June 30, 2014, student loan debt totaled an estimated $1,275 billion (based on Federal Reserve Board estimates), or five times the level outstanding in 2003 of $250 billion (the earliest figures I could find on a comparable basis; the amounts were so small earlier, that the Fed did not separately break them out).  Student loans have long been common in the US (I had them when I went to school in the early 1970s).  But the amounts outstanding then were relatively small, were at low interest rates, and were for most of us easily manageable.  It is different now.  Student loan debts have exploded in recent years, with a five-fold increase over just the past decade.

The declining affordability of college by this measure is of course a consequence of what has been happening to the two components of the measure.  One has been the unwillingness of Congress to allow the minimum wage to keep up with inflation.  As noted in an earlier post on this blog, the minimum wage in the US has stagnated over the last half century, and is indeed lower now (in real terms) than it was in 1950, when Harry Truman was president.  Real GDP per capita is 3.5 times higher now than it was in 1950, and real labor productivity has increased similarly.  These are not small increases.  I find it amazing (and shameful) that the real minimum wage is lower now than it was then.

For the period since 1963 (the earliest date in the chart), real GDP per capita and real labor productivity are both now 2.7 times higher than what they were then.  But the real minimum wage is close to 20% less now than it was in 1963.

The fall in the real minimum wage fall since the 1960s is half the story.  Note that the inflation measure used for determining the real minimum wage is the general consumer price index (the CPI).  This is the price index for the overall basket of goods and services a US household will purchase.  But the price index is an average over all the goods and services that households buy, and individual items can have price increases that are more than, or less than, this overall average.

In particular, the cost of attending a state university has increased by a good deal more than the overall CPI.  Based on the overall CPI, the real cost of attending a state university (for tuition, room, and board) is now 2.5 times what it was in 1963.  The cost of the tuition component alone is now 4.5 times higher.  The basic cause has been the cutbacks in state budgetary support for their colleges and universities, with tuition and other charges then increased to make up for it.

As a result, the minimum wage has fallen in real terms (based on the overall CPI) since the 1960s, at the same time that the real cost of attending school (relative to the overall CPI) has increased sharply.  The two factors together account for the steep fall in the share of state university costs that one can pay for by working at the minimum wage.  The curves in the chart at the top of this post show that path.

It is important to recognize that this declining affordability of attending state schools was not inevitable, but rather the result of policy choices.  The minimum wage has not been adjusted to reflect general inflation, even though real GDP per capita and labor productivity have both grown substantially.  And as was discussed in another post on this blog, there is no evidence that raising the minimum wage by the modest amounts now being discussed would lead to adverse effects on employment.

Government support for state colleges and universities has also been scaled back, leading to tuition and other cost increases substantially higher than that reflected in the general price index.  This has also been a policy choice.  And it is a policy choice that has prioritized the present generation (with tax cuts a prime example) over the coming generation, that is denying many of the coming generation the educational opportunities we ourselves had.

The Obama Bull Market Rally on Its Fifth Anniversary

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S&P 500 Index, March 9, 2009, to March 10, 2014

Bull Markets, 1940-2014, updated to March 10, 2014

 
   Bull Market Rallies Since 1940
  Ranked by overall growth in real terms
Start Date End   Date Calendar Days Nominal % Change Real % Change Real Rate of Growth
Dec 4, 1987 Mar 24, 2000 4,494 582% 361% 13%
Jun 13, 1949 Aug 2, 1956 2,607 267% 222% 18%
Aug 12, 1982 Aug 25, 1987 1,839 229% 181% 23%
Mar 9, 2009 Mar 10, 2014 1,827 177% 151% 20%
Apr 28, 1942 May 29, 1946 1,492 158% 124% 22%
Oct 22, 1957 Dec 12, 1961 1,512 86% 76% 15%
Oct 9, 2002 Oct 9, 2007 1,826 101% 75% 12%
Jun 26, 1962 Feb 9, 1966 1,324 80% 69% 16%
May 26, 1970 Jan 11, 1973 961 74% 57% 19%
Oct 6, 1966 Nov 29, 1968 785 48% 37% 16%
Oct 3, 1974 Nov 28, 1980 2,248 126% 34% 5%

Today marks the fifth anniversary of the Obama bull market rally.  The rally began on March 9, 2009, just six weeks after Obama was inaugurated.  A reader of this blog suggested that on this anniversary, an update of previous posts on the strong performance of the stock market during Obama’s tenure (see here and here) might therefore be timely and of interest.

Stock market prices have indeed continued to rise, and as the table above shows, stocks during Obama’s term in office have now posted the fourth highest gains of any stock market rally since 1940.  Market rallies are defined as at least a 25% rise in the S&P 500 Index (in real terms), without a 20% fall.  Equity prices (as measured by the S&P 500) have risen by 177% in nominal terms since March 9, 2009, as of the close today.  The increase in real terms (using the CPI inflation index) has been 151%.  And since this rally is on-going, it could move further up in rank.  In addition, in just twelve more days (assuming the rally does not suddenly collapse) this rally will be the third longest in terms of calendar days of all market rallies since 1940.

It is also interesting to see how steady the upward progression has been, especially since September 2011.  This is shown in the graph at the top of this post.  I do not believe anyone had predicted this.

The rally could also end tomorrow.  All rallies eventually come to an end, and this one will as well.  But the rise in prices already achieved, the fourth largest since 1940, needs to be recognized.

Should Obama be given credit for this historic market rally?  Not fully.  I doubt that equity prices in themselves are a primary objective of what Obama has been trying to achieve.   Rather, the objective has been a stronger economy.  Regulatory as well as policy measures have been taken with the aim of strengthening the system, and this ultimately benefits business (as well as the population) as a whole.  This then helps equity prices.  Unfortunately, and as this blog has discussed in earlier posts, fiscal drag from cuts in government spending has held back the pace of the recovery, and this fiscal drag is continuing.  The economy could be doing better.  Nevertheless, there has been a partial recovery.  But it is not yet complete, nor as rapid as one would have had without the fiscal drag.

But what this strong growth in the stock market does clearly indicate is that the charges by Republican politicians that Obama has been bad for business (indeed a disaster for business many of them have said), has no basis.  If there were any truth to the charge, stock market prices would not be up by 177% in nominal terms (and by 151% in real terms) over the last five years, leading to the fourth biggest rally in stock prices in three-quarters of a century.