With the election over, this month’s hot topic in Kansas politics returns to the budget. Are we in a huge budget hole, created by the tax cuts championed by Gov. Sam Brownback? Or, will economic growth save the day?
The state’s own consensus revenue estimates are glum, forecasting a deficit that grows in the coming years, despite the governor’s proposal to fill the hole with temporarily reduced pension fund contributions and by “sweeping” highway trust fund balances. State economists estimate a $669 million revenue shortfall in fiscal year 2016. If implemented across the board, this means more than 10 percent in cuts to every state agency. If the courts mandate higher school aid, the gap grows. Nor does it factor in rising costs: a 10 percent cut in spending translates into a far greater cut in services, because of the failure to cover rising costs like employees’ health care.
The Kansas Policy Institute’s blog paints a far rosier picture. They forecast revenues nearly $400 million higher in FY 2016 than do the state’s economists. The conservative KPI strongly supports the elimination of state income tax, as does the governor.
Why the gap?
Enter “dynamic scoring.” Essentially, dynamic scoring is a different way of calculating budget estimates whenever tax cuts are involved. It is based on the Laffer Curve, designed (allegedly on a dinner napkin) by economist Arthur Laffer in the 1970s. The Laffer Curve predicts that if taxes get too high, cutting those high taxes will actually increase government revenue. This is because they will spur on so much new economic activity that the economic base will grow. Tax rates are lower, but economic growth fills the gap: lower rates X bigger economic base equals revenues the same or even higher than before. Brownback hired Laffer as a consultant for his budget blueprint.
Congressional Republicans also like dynamic scoring. Last year, the U.S. Senate joined the House in requiring that it be used to estimate the impact of proposed budget changes, particularly tax cuts. Even a few Democrats voted for it. Dynamic scoring is the ultimate budgetary win-win: a chance to match conservatives’ beloved tax cuts with liberals’ concern for funding critical government services like education, infrastructure and social services.
Unfortunately, economists cannot agree about which tax rate raises the most — the one at which, if taxes go any higher, the resulting economic slowdown actually reduces collections. Also, in order to work, dynamic scoring needs to calculate the cost of cutting government services. After all, growth may also come from paying teachers, building and repairing infrastructure and the providing health care. In fact, the evidence that marginal changes in tax rates drives growth is rather questionable — many argue that businesses make decisions based on the market, not tax rates. Finally, budget estimators have been using dynamic scoring for years, usually producing reasonably accurate estimates. However, legislators want them to be larger. Mandating more-aggressive dynamic scoring means trying to fix a math problem with legislation, much like the urban legend about legislators who, years ago, tried to set pi equal to 3. It is wise to remember the folk saying: “if something seems too good to be true … it probably is.”
Michael A. Smith is an associate professor at Emporia State University.