Good tax policy advocates have looked aghast at recent developments in Kansas, Louisiana, and Maine. Whatever your view on the appropriate size and role of government, there are right and wrong ways to pay for public services. Ideally, people will determine the level of government they want and pay for it with broad-based taxes that align with certain principles. As troubling, the way tax policy plays out in some states undermines public confidence in the political and fiscal system.
In Kansas, Gov. Sam Brownback (R) had a good idea. He wanted to cut back on the size of government and lower tax burdens. But he cut taxes far more than the state could possibly afford. Contrary to what some arch conservatives believe, people want a certain level of government. They want public safety, transportation, and education. They want someone to answer the phone when they dial 911.
Brownback could have gotten away with, and might have even been heralded for, more modest tax reductions. He went big in 2012 -- but in 2015, the state could not pay the bills. The 2012 tax cut was among the worst tax policy decisions of all time. Exempting income from passthrough entities was awful for myriad reasons, including that it blew a gigantic hole in the budget and that contrary to proponents' predictions, it did not result in an economic boom. Indeed, its primary effect is to provide an incentive for C corporations to turn into limited liability companies.
When Brownback realized the folly of his big cuts, he and his allies should have reversed the passthrough exemption. Maintaining the income tax rates at 2012 levels could have still solved the budget problem. But politicians rarely admit mistakes; the bigger the mistakes, the rarer the admissions. Brownback compounded this policy mistake by raising sales and cigarette taxes. Brownback inexplicably proclaimed that this was not a tax increase when viewed in conjunction with the 2012 cuts, but nobody was buying that. The result was to maintain a bad exemption for passthrough income and pay for it with regressive consumption taxes. But there is nothing inherently wrong with consumption taxes.
A very knowledgeable person told me that Brownback set efforts to reduce taxes back 10 years. No one wants to be like Kansas. Liberals might celebrate that outcome -- but folks who genuinely believe in more limited government and lower tax burdens will rue the Kansas experiment.
Although less publicized nationally, events in Louisiana were more bizarre. The Louisiana Legislature passed legislation to create a controversial education credit scheme aimed at raising revenue while allowing the governor to say he did not raise taxes in violation of his pledge never to do so. Gov. Bobby Jindal (R) signed the pledge with Americans for Tax Reform, as did many Louisiana legislators.
The pledge, the brainchild of Grover Norquist, president of Americans for Tax Reform, is a terrible idea for several reasons. First, no leader should promise never to raise taxes because, frankly, there are times when it is necessary. Over 50 Kansas legislators and Brownback, who have signed the pledge, found that out last week. I agree with Norquist philosophically; less government is good. But the pledge only leads to more debt at the federal level and gimmicks in state governments. William A. Niskanen, one of the great intellectuals advocating limited government, was critical of the pledge, saying that people should pay for government with visible taxes. They likely would want less government.
Louisiana had a budget shortfall of $1.6 billion. The Legislature cut business credits and exemptions to close the gap. By the way, this had the added benefit of broadening the base -- generally a good thing. At first, folks in Louisiana who signed the pledge said that eliminating deductions did not amount to a tax increase. Except that when you eliminate deductions and credits, you actually increase tax burdens. Americans for Tax Reform is pretty clear about that.
The solution the Jindal administration came up with ranks up there with the most bizarre gimmicks in state tax history. They crafted a scheme that charges every public university student a fee. But the fee was fake. All students immediately get a credit to offset the fee. The credit rendered the elimination of the deductions revenue neutral. Who runs a government this way?
The whole sordid affair was made more amusing when a group of lawmakers wrote Norquist and inquired whether their plan constituted a tax increase in violation of the pledge. The Louisiana experience highlights the problem of promising to never raise taxes. Most pledgers want to keep their promises but can't. That is a problem.
In Maine, Gov. Paul LePage (R) wants to repeal the personal and corporate income tax. Theoretically, I am on board. I think, in the long run, states with no or low income taxes are better off. But the state income tax raises $1.7 billion every year. If you are going to cut that much money, you need to explain how you are going to pay for it. There are three rational options LePage could have identified: raise other taxes, most likely the sales tax; cut services; or offer a combination of other tax increases and service cuts. He offered no plan to pay for the cuts.
That is a shame because I think it is a healthy debate to have. The problem, it seems, is that LePage has bought into the idea that the tax cuts will pay for themselves. History suggests they won't. I think the economy of Maine will be better without an income tax. But to think that the economic growth will result in $1.7 billion in tax revenue, apparently from the existing sales tax, does not make sense.
In any event, the Democrat-led Maine House rejected the income tax repeal idea. From talking to folks in Augusta, they rejected the repeal for two reasons. First, the Democratic legislators were not inclined to eliminate the income tax. They're Democrats. They believe in taxing income. Second, they did not believe the math could ever work. You would think that would be the end of the debate.
But LePage then did something unusual. He said he would veto every bill sponsored by a Democrat that came to his desk until the Legislature passed the constitutional amendment. Most of us would scold our children if they reacted that way.