This month American Legislative Exchange Council (ALEC) released the fifth edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. As in the past, Kansas performs in the middle of the pack in one measure, below average in another, with little or no progress achieved in making Kansas competitive with other states.
The report’s authors are Arthur B. Laffer, Stephen Moore, and Jonathan Williams. Besides the ranking of the states, the Rich States, Poor States report always contains useful information about economic and tax policy. This year a chapter is titled “10 Golden Rules of Effective Taxation,” starting with “When you tax something more you get less of it, and when you tax something less you get more of it.”
Another important rule or observation is “An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates that encourages production will lead to less than a dollar-for-dollar reduction in tax revenues.” People seek to avoid paying taxes, and as tax rates rise, they will employ various methods to accomplish this. Some will simply stop earning more income. That’s why predictions of increased revenue after tax rate increase are rarely fulfilled. Similarly, when tax rates are reduced, the incentive to avoid taxes is reduced. Additionally, the business decision process is focused on achieving productive economic goals instead of tax avoidance.
Rule five is the famous Laffer Curve: “If tax rates become too high, they may lead to a reduction in tax receipts. The relationship between tax rates and tax receipts has been described by the Laffer Curve.”
Rule seven explains the strategy behind Kansas Governor Sam Brownback’s goal of reducing and eliminating the Kansas income tax: “Raising tax rates on one source of revenue may reduce the tax revenue from other sources, while reducing the tax rate on one activity may raise the taxes raised from other activities.” If business taxes rise, we expect less business, therefore fewer employees with jobs contributing taxes. The converse — if business taxes fall, we expect more business activity — means more employees paying the other taxes that Kansas relies on: sales and property taxes.
In the second chapter — Paving the Path to Prosperity — the authors discuss migration data made available by the Internal Revenue Service. Despite the fact that some states have gorgeous weather and in some states the weather is terrible, that’s not why people move around: “Census data consistently shows that people choose where to live, engage in commerce, and invest based on economic competitiveness.” California and Hawaii are losing many people to states where the economic climate is better. While we in Kansas can’t control the weather, we can control our state’s economic policies: “State elected officials obviously have little control over their states’ 10-day forecasts, but they do control their states’ tax climates. We know tax policy is not the only reason people are motivated to live, invest, or grow a business in a state, but it plays a significant
role. State lawmakers should keep this in mind as they shape public policy.”
The impact of state employee pension plans is also important, write the authors. Kansas is in especially poor condition in the area, and emerging legislation offers some relief for Kansas taxpayers, but not much.
In the chapter “Policies for Growth” the authors address an issue very relevant to Kansas. It is said by many that we need an income tax in Kansas because we aren’t blessed with natural resources like, say, Texas, which receives huge income from the oil industry. First, the author’s note that having an income tax is still harmful: “But while the existence of oil, gas, and other natural resources clearly makes things easier for a state’s government, they do not negate the impact of a state’s income tax.”
In Texas, by the way, three percent of the state’s budget comes from severance taxes. (In Kansas it is 1.1 percent.) While this revenue is helpful to Texas, it isn’t anywhere near the magnitude of benefit that the Kansas government spending lobby would have you believe.
If we need more evidence of the harmful effects of income taxes, the authors present results from the 11 states that have introduced an income tax over the past 50 years. The results? “What we find astonishing is how the size of the economy in each one of these states has declined as a share of the total U.S. economy compared with a time just prior to when each state introduced its income tax. Some of the declines are quite large.”
While there is a link between income tax rates and state economic performance, the authors did not find the same link regarding sales tax rates. It has a neutral effect, they write, and is a preferred method for generating revenue for the states. Sales tax receipts are also less volatile than income tax revenues.
Kansas among the states
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.
In this ranking, Kansas performs well for having no inheritance or estate tax, having a good state liability system, a state minimum wage that is not higher than the federal minimum wage, having low workers’ compensation costs, and being a right-to-work state.
Areas in which Kansas performs poorly include personal income tax progressivity, sales tax burden, recently legislated tax changes, debt service, and number of tax expenditure limits (Kansas has none).
A problem in Kansas is the number of government employees. The measure “public employees per 10,000 population” is 708.2, which ranks Kansas 48th among the states. Only Alaska and Wyoming have more government employees per capita.
The complete Rich States, Poor States report is available for purchase or free download at Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. An oped in the Wall Street Journal by authors Laffer and Moore is at A 50-State Tax Lesson for the President: Over the past decade, states without an income levy have seen much higher growth than the national average. Which state will be next to abolish theirs?.