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The Laffer Curve Brings Red Ink to Red States

May 3, 2014

For over 30 years, it has been the Republican Party's uber lie. Ever since Jude Wanniski first sketched Arthur Laffer's curve on the back of a napkin, conservatives have claimed that "tax cuts pay for themselves" because the extra economic activity they incentivize will produce tax revenues at least as great as they otherwise would have been. Sadly, the GOP's faith-based economics has been disproven by three decades of experience. President Ronald Reagan tripled the national debt. During his tenure, George W. Bush nearly doubled it again. Even now, the nonpartisan CBO explained when most of them were made permanent in 2013, the Bush tax cuts are still the largest driver of America's long term debt.
Nevertheless, over the past few years, Dr. Laffer has prescribed his supply-side snake oil to governors in Republican-controlled states. And almost everywhere they've been used, Laffer's tax cuts have predictably produced oceans of new red ink.

Nowhere is the budgetary disaster more catastrophic than in Kansas, where in 2012 GOP Governor Sam Brownback slashed the top income tax rate from 6.5 percent to 4.9 percent while shifting the burden to the Jayhawk State's lower income residents. His stated goal to eliminate the state income tax altogether. But as Brownback's own Governor's Council of Economic Advisers warned in March, the Kansas economic miracle he predicted has not to come to pass. Instead of jobs, his "Red State Model" has brought only deficits:

April income fell about $93 million short of projections. Overall, the state has taken in about $480 million less than it had by this point in the last fiscal year.

Through fiscal year 2019, Kansas will have to slash a combined $1.5 trillion in spending in order to achieve the balanced budgets required by state law. Already gripped by a funding crisis for education triggered by a recent state Supreme Court ruling, Kansas also saw its credit rating cut by the Moody's rating agency.

If you think you've seen this movie before, that's because you just did. Today, Fitch joined Moody's and S&P in downgrading New Jersey's credit rating. In the Garden State, Governor Chris Christie is facing an $800 million revenue shortfall with only two months left in the fiscal year.
As in Kansas, where Sam Brownback complained that "what we are seeing today is the effect of tax increases implemented by the Obama administration that resulted in lower income tax payments and a depressed business environment," Christie blamed the federal government for his own mismanagement:

"What we're being told initially is that this is the effect of the change in the law at the end of 2012 by the Obama administration and the Congress to increase tax rates on upper-level individuals," Christie said.

That, of course, is complete nonsense. While some wealthier taxpayers shifted income into 2013 to avoid paying higher taxes (especially for capital gains), there is no evidence that this is having any impact on the coffers on any of the 50 states. But what clearly had an impact on New Jersey's budget were Christie's wildly optimistic revenue forecasts. As the Star Ledger described his election-year budget in 2012:

A Star-Ledger review of the budgets of all 50 states shows that when Christie projected earlier this year that New Jersey's revenue would swell by 7.4 percent over the next fiscal year, his forecast was the highest jump of any of the 50 states -- and more than double the national average of 2.8 percent.
The newspaper's review shows the governor was far more optimistic than his counterparts in New York, Pennsylvania and Delaware, which have lower unemployment rates than New Jersey but are forecasting revenue growth under 4.7 percent for next year. When $530.8 million from tax cuts are factored in, Christie is actually expecting a more robust 9.2 percent increase in revenue.

Worse still, Christie was warned--year after year--by David Rosen of the nonpartisan Office of Legislative Services that revenue would fall short of the levels needed to meet New Jersey's requirement of a balanced budget. As Vox reported, Christie greeted those dire predictions by blasting Rosen and calling for the firing of the 30-year budget veteran who had correctly forecast Christie's 2012 and 2013 red ink.
This isn't how "the Red State Path to Prosperity," as Arthur Laffer and Stephen Moore branded it a year ago, was supposed to work. "Red states in the Southeast and Sunbelt are following the Reagan model by reducing tax rates and easing regulations," they wrote. And as Politico declared in its October hagiography titled, "Arthur Laffer is back as GOP tax man":

Now, Laffer is back. The 73-year-old helped Gov. Sam Brownback (R-Kan.) sell his tax reform idea to Kansas, pushed Republican Tennessee Gov. Bill Haslam to ditch the estate tax and gave momentum to North Carolina lawmakers desperate to slash rates. All told, Laffer has advised about a dozen GOP-run states on taxes in the past couple of years.

As it turns out, Laffer's toxic brew is precisely what's the matter with Kansas. As the Center on Budget and Policy Priorities (CBPP) documented in March, Kansas has lagged the U.S. a whole in jobs and income growth since its tax cuts went into effect in December 2012. Kansas is one of the few states still slashing education spending. And the revenue shortfalls show no signs of easing.
It's no wonder U.S. News concluded, "Kansas Can't Tax Cut Its Way to Prosperity." Sam Brownback, Pat Garafolo explained, has been practicing the equivalent of flat-earth economics:

There was no real reason, though, to think that Brownback's tax plan would have dramatic effects on his state's economy. In fact, the history of tax cutting as a job-producing policy at the state level is full of measures that were sold as able to cause a boom, but turned out to be a bust. As the Economic Policy Institute and the Massachusetts Budget and Policy Center found in a comprehensive review, "The evidence from the hundreds of survey, econometric, and representative firm studies that have evaluated the effects of state and local tax cuts and incentives makes clear that these strategies are unlikely to substantially stimulate economic activity."

What's failed at the state level long ago proved catastrophic for the federal government. Ever since Ronald Reagan first took the oath of office, Republicans have taken it as an article of faith that we live on the top half of Arthur Laffer's curve above, a place where reducing tax rates magically increases tax revenue. Instead of building a more prosperous America, Republicans built only national debt and record income inequality.
Which is why in June 2012, not a single economist surveyed by the University of Chicago Booth School of Business agreed with the statement, "a cut in federal income tax rates in the US right now would lead to higher GDP within five years than without the tax cut." In his comments, David Autor of MIT pointed out, "Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer." Former Obama administration economist and current University of Chicago professor Austan Goolsbee put it this way:

"Moon landing was real. Evolution exists. Tax cuts lose revenue. The research has shown this a thousand times. Enough already."

Enough indeed. While Tennessee and North Carolina are grappling with new deficits, Oklahoma Republican Governor Mary Fallin this week signed a new tax cut bill into law.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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