During this news cycle, the Midwestern governor occupying the greatest media bandwidth is the one just selected for a spot on the GOP ticket. We can certainly expect to see Indiana Governor Mike Pence’s name all over the news for the next four months, but it’s also worth taking a look at how other Midwestern governors are making a real impact, and at the state level.
Kansas Governor Sam Brownback’s 2013 tax reform is to thank for the state’s economic growth and low unemployment rate. Photographer: David Paul Morris/Bloomberg
Now in the third year of his bold tax experiment, Kansas Governor Sam Brownback can see the ways in which reducing (and, in many cases, eliminating) the state income tax is yielding incremental, positive effects for Kansans.
Significantly, every year since the tax cuts were implemented, Kansas has surpassed the state record for new business formations. When we consider that startups have decreased nationwide since the Great Recession of 2008, this achievement is particularly remarkable. What’s more, the Kansas unemployment rate stands at 3.7% – the lowest the state has seen since 2001, and well below the national average of 5.5%.
Why the incremental success in Kansas? We certainly can’t attribute these victories to the state’s core industries; due to economic turmoil felt nationwide, Kansas too has seen dips in farm incomes (owing to consistently low crop prices and steep declines in cattle prices), a fall in commodity prices and exports, sluggish movement in oil and natural-gas markets, and declining manufacturing. Without these four industries buoying Kansas’ economy, we must look to other factors: namely, the income tax cut that continues to make a real difference, particularly for small businesses and working families.
Governor Brownback put his faith in the private sector to grow the Kansas economy, rather than the government. By eliminating the income tax for small business, the Brownback administration effectively put money back in families’ pockets and provided promising new businesses with an environment primed for growth. Following the major tax reform in 2013, individual income taxes for individuals, families and small business went down by 30% on average. Seventy-one percent of the savings went to individuals and families, who could then save or spend as they chose. Twenty-nine percent of the savings went to small businesses, allowing them to make larger investments in equipment, space and staff.
Prior to tax reform, Kansas possessed the second-highest individual income tax in the region; today, it is the region’s second-lowest, bested only by Colorado. This is meaningful not just for small businesses and middle- to upper-class families, but also for Kansans of fewer means. Kansas now offers the highest Earned Income Tax Credit in the region. Plus, the Brownback administration increased the standard deduction for “head of household” filings in order to help single-parent households. Importantly, 388,000 of the lowest-income Kansans have been removed from the tax rolls, leaving them with zero tax liability.
Equally important from a regional perspective is that fact that Kansas is gaining ground over neighboring Missouri when it comes to gains in net adjusted gross income. In 2013, the same year that the Brownback tax cuts took effect, Kansas experienced a positive reversal in migration of wealth between the two bordering states. Kansas enjoys a nearly $85 million advantage in income gains from Missouri. This is a major reversal. Consider the data between 1995 and 2009, which shows more than $263 million leaving Kansas for Missouri. A longitudinal examination of this trend will bear out whether the flow of money correlates with the institution of Brownback’s tax policy, but the current evidence is certainly compelling. While other state economies struggle under the weight of current economic uncertainties, the incremental successes in Kansas make a solid case for pro-growth reform through income tax cuts.
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Good news for ballot-printing companies in California: there are 89 ballot measures up for a vote in the June 7 primary. Bad news for pretty much everyone else in California: there are 89 ballot measures up for a vote in the June 7 primary. Why such a mind-bogglingly large number of measures? Quite simply, local jurisdictions are struggling to fund key projects (including road repairs and transit improvements), thanks to a state legislature incapable of – or unwilling to – modernize its tax system to keep pace with the modern California economy.
As is true in many states, over the past several decades California has shifted increasingly toward a service economy. However, the tax code has not evolved to reflect this change. The sales tax – certainly the most predictable of revenues – is bizarrely under-utilized. In the Golden State, the sales tax applies almost only to retail goods (auto parts, shampoo) but not to service (auto repairs, haircuts). As a result, the sales tax is expected to make up just 22 percent of California’s general fund revenue next year (by way of contrast, in 1950 the sales tax provided 60 percent of this revenue). Making matters worse, the state legislature refuses to raise the gasoline tax – the very tax that was intended to fund the transportation projects and infrastructure improvements that many California towns need.
In the absence of a modern and logical state tax structure, jurisdictions are left to their own devices, and every two years voters must wade into the muddy public-finance waters in order to fund basic needs for their cities and towns. In the Sacramento County town of Isleton, voters will decide on adding a half-cent sales tax in order to pay for ambulances. In the city of Davis, voters will be asked whether they approve a 10 percent gross-receipts tax on marijuana sales. All told, according to CaliforniaCityFinance.com, Californians will vote on about $6.6 billion worth of parcel taxes, business license taxes, sales taxes, and school bonds.
If all of this sounds unnecessarily complicated, that’s because it is. Governor Jerry Brown and leaders in the California legislature desperately need to overhaul the outdated and illogical tax code. At present, California relies far too heavily on the most mobile and unpredictable of revenue sources: the individual income tax. With the highest personal income tax rate in the nation(13.3 percent), California effectively punishes productivity and encourages successful earners to take their businesses elsewhere.
Gov. Jerry Brown explains his budget proposal during a news conference at the state Capitol in Sacramento in January. Randall Benton / Sacramento Bee
Presidential hopeful Bernie Sanders loves to shout that the richest one-percent should “pay their fair share” – and in California, they certainly are. In fact, in 2014 the top one-percent of Californians paid nearly half (48%) of all the state’s personal income taxes. In a recent article for the Los Angeles Times, reporter George Skelton calls this overreliance on the income tax what it is: “lousy fiscal policy.” Describing California’s tax structure as not progressive but instead perpendicular, Skelton goes on to write that “the problem isn’t about fairness. It’s about stability — mainly the stability of programs that benefit the poor, such as healthcare and welfare. It also jeopardizes services for everyone: education and public safety.”
In the next fiscal year, about 70 percent of California’s general fund revenue is expected to come from the state income tax. That is an outrageous percentage, and one that puts the Golden State on increasingly shaky footing. Dozens of state ballot measures do not equal sound economic policy. Residents should not be forced to fund vital projects at the ballot box every two years. Instead, Governor Brown and the state legislature should make it a top priority to overhaul and modernize California’s tax code. The state’s stability depends upon it.
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Twenty-five years ago, amid economic turmoil and a looming budget crisis that put legislators at each other’s throats, the then-governor of Connecticut made a fateful decision. Unsure of the best way to dig Connecticut out of its financial hole, Governor Lowell Weicker implemented an income tax.
The Nutmeg State would certainly come to rue that day.
Of course, Governor Weicker did not anticipate that the adoption of an income tax would send the state into a tailspin. In fact, as he announced his plans on May 15, 1991, he said, “I feel great.” In 2015, however, Connecticut taxpayers are feeling less than great. Despite Governor Weicker’s promises – that the income-tax revenue would be spent responsibly, that the additional dollars would correct Connecticut’s financial course – the new tax only led to further disarray and decline.
Just last week, the state’s General Assembly passed another budget that cuts services while continuing to spend more money. (The budget is so ill-conceived that it prompted credit downgrades from Fitch and Standard & Poor’s.) Anyone with a passing knowledge of Connecticut’s fiscal woes knows this is just the latest in a long line of bad decisions made by the state’s leadership. Connecticut’s irresponsible spending makes it an unappealing place for many families and businesses, and high taxes prompt alarming levels of outward migration. According to an analysis by The Yankee Institute for Public Policy, Connecticut’s outmigration causes the state to lose $60 of income every single second.
Wealth Migration 1992-2014 — Connecticut Lost $12.36 Billion in Annual Gross Income. Source: How Money Walks
Numbers from How Money Walks corroborate The Yankee Institute’s findings, while showing the grim longer-term picture: Between 1992 and 2014 (the most recent year for which Internal Revenue Service taxpayer data is available), Connecticut lost $12.36 billion in net adjusted gross income (AGI). Perhaps not surprisingly, the bulk of this outwardly migrating AGI went to states that do not punish work by levying an income tax. The state of Florida won the lion’s share of Connecticut’s fleeing AGI, with $7.96 billion leaving the Nutmeg State for the Sunshine State.
Connecticut lost most in AGI to Florida, North Carolina, Massachusetts, Texas and California. Source: How Money Walks
Of additional concern is the impact Connecticut’s heavy burden has on the state’s wealthy residents. The state’s largest taxpayers are taking a look at the financial environment and moving their assets elsewhere. Not only are wealthy residents frustrated by the big hit the income-tax takes, they also must contend with Connecticut’s estate tax and gift tax. Instead of remaining in Connecticut and putting much of their wealth into government coffers, many wealthy families are electing to move to one of the 36 states that does not have an estate tax – or to one of the 49 states that does not have a gift tax (that’s right, only Connecticut levies this additional tariff). This exodus of wealth should alarm state leaders. When families with means leave Connecticut, they take with them income taxes, sales taxes, future jobs created by their companies, and philanthropic support for Connecticut’s charitable organizations.
The loss of wealthy families is of particular concern in Connecticut, because the state relies heavily on residents with adjusted gross incomes above $1 million. Internal Revenue Service data shows that, in 2013, people in this income bracket paid 40% of the federal taxes from Connecticut. That’s higher than any neighboring state, and it’s 67% higher than the national average.
Additionally, Connecticut is failing to grow its number of wealth residents in a sustainable way. Between 2010 and 2013, the number of Connecticut federal tax returns with adjusted gross incomes of $1 million or more grew by just 9.5% – compared with the much more robust growth percentage of 30% in business-friendly Florida. As Connecticut resident and Webster Bank CEO James C. Smith wrote in a recent opinion piece for the Hartford Courant, “When we lose these neighbors to lower-tax states, we lose not only their tax dollars but also their civic involvement, ingenuity, generosity and entrepreneurial spirit — qualities that Connecticut dearly needs to retain.” It is my hope that Connecticut, as well as other high-tax states, takes these words to heart. Otherwise, we may be looking at another 25 years of turmoil and decline.
Thanks to 24-hour coverage of the current presidential contest, we can’t avoid becoming acquainted with each candidate’s plans and platforms. Of course, by this point it’s no secret that Vermont Senator Bernie Sanders would like to raise taxes exponentially. Analyst and author Rick J. Newman calls Sanders’ plan “so utopian as to be hopeless,” noting that Sanders’ goal of bringing in about $1.5 trillion in new tax revenue per year would boost the federal government’s tax grab by about 46%.
For now, this is all in the realm of speculation. Sanders is giving idealistic speeches, and analysts and economists are crunching the numbers and making predictions. What’s interesting, though, is how Sanders’ tax-and-spend approach is mirrored in his home of Vermont – and to the state’s detriment.
Last month, the Vermont House of Representatives approved a $48 million hike in taxes and fees. The package, which is now in the hands of the Democrat-controlled Senate, would raise levies on a variety of items, including home heating oil and an Employer Health Assessment Tax on businesses who do not provide health insurance for their employees. If the bill gains approval by the Senate and then receives the blessing of Democratic Governor Peter Shumlin, it will be yet another anti-growth blow to a state that routinely loses residents (and their incomes) to states with lower tax burdens.
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Maryland Governor Larry Hogan faced plenty of challenges when he took office. His predecessor, Democrat presidential candidate Martin O’Malley, left him with plenty of messes to clean up, including a lagging private sector and a number of arcane and unpopular taxes. To make matters much worse, in June 2015 Governor Hogan announced his diagnosis with an aggressive form of lymph node cancer.
Fortunately, today the governor’s cancer is in remission and the Maryland economy is on a much brighter path. And while the governor deserves significant credit for his accomplishments, the Maryland victory is shared equally by the job creators who want to make the Old Line State a viable place in which to work and live.
Read the full article on Forbes.com here
The governor’s laser-like focus on reducing taxes – particularly income taxes – in the Buckeye State informs his performance on the debate dais as well as in his recent year-end review. In that speech, Kasich emphasized his commitment to making Ohio more business-friendly. He told the audience: “We killed the income tax for small business. We have to lower the income tax more.”
Read the full article on Forbes.com here
While some states’ economic outlooks appear cloudy at best, Florida’s financial future remains bright. This week the Florida Chamber of Commerce released the details of its 2016 Competitiveness Agenda, a detailed legislative blueprint that dovetails nicely with Governor Rick Scott’s pro-growth plans. The Chamber’s agenda offers strong support for two key Scott initiatives: a call for $1 billion in tax cuts to attract new businesses to the state.
Importantly, neither the Chamber nor the Governor show any sign of slowing down on their pro-growth agendas. Florida’s recent successes are encouraging those in business leadership and civic leadership to double down on their efforts to ensure that Florida’s economy continues to rebound at its current quick pace. Late last year, the Sunshine State surpassed New York as the third-most populous state in the nation. Each day, Florida grows by more than 800 people. The 2016 “State Business Tax Climate Index” from the nonprofit Tax Foundation once again ranks Florida among the top ten; this year, Florida takes the number-four spot thanks to its business-friendliness and nonexistent individual income tax.
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Unstable revenue streams can wreak havoc on a state’s economic position and potential for growth. This is the concern for many legislators in Oklahoma, a state heavily reliant on taxes related to the energy sector. As a result, legislators are considering more predictable revenue streams.
Oklahoma State Representative Mark McCullough, who recently announced that he will not seek re-election in 2016, has committed to spending a good deal of his last 12 months in office focused on stabilizing the Sooner State’s budget. He put it bluntly: “We are really in the hole this year, and I imagine most of my time will be spent on that.”
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It’s been nearly a decade since Arizona lowered its personal state income taxes, and now the Grand Canyon State sits poised to become the tenth state in the union to eliminate personal income tax all together. With members of the House and Senate working collaboratively, and a fiscally conservative governor in the capital, Arizona’s upcoming legislative session could see the enactment of sweeping change.
The nonprofit, nonpartisan Tax Foundation grants Arizona some pretty decent boasting rights, with the 13th-lowest individual income tax and the 10th-lowest state and local income tax in the nation. However, eliminating the income tax would give Arizona an even greater competitive advantage when luring businesses, creating jobs, and encouraging new investments. In the past, Arizona’s neighbor Nevada has been a perennial champion of business growth, thanks to a penchant for cutting and eliminating taxes. However, those days may be over, as earlier this year Senate lawmakers passed Governor Brian Sandoval’s plan to raise $438 million in taxes a year.
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