Tax policy comes as second nature to investment bankers. Earlier this month, the Census Bureau its annual accounting of state government revenues. It is a survey of all finances related to state government spending. The data allows researchers to address, in a broad way, various debates in the tax policy world.
Among those debates, the most contentious is probably the recent tax cuts in Kansas. Kansas enacted broad-based tax reform in an effort to improve its long-term economic outlook. Among the major components was reducing the income and corporate income tax rates and eliminating income tax on pass-through entities.
The debate, unsurprisingly, was whether the tax cuts would pay for themselves over time by inducing stronger employment growth. The recently released data provides an initial insight.
Income and Corporate Tax Revenue Across States
The tax change comprises two components. The first is the revenue side. The following table is a look at how income and corporate income tax revenue has performed by state since 2012, sorted by growth in the tax burden.
Interestingly, and completely unsurprising, income and corporate income tax is down about 13% in Kansas, about 5% below the next closest to the bottom – Delaware (-8%). The revenue decline in the initial years is as expected. Tax cuts take time to pay back.
The next question is – did the tax cuts boost economic growth in Kansas above what happened in other states?
The Employment Picture by State
With the revenue picture looking about as expected, here’s a look at the employment picture.
As a reminder, the crux of the debate, at least according to the way Mr. Brownback sold it, was not whether revenue would go negative in the initial year, but rather that employment growth would be boosted. Here’s the early look.
Fascinatingly, Kansas appears to have experienced a boost in employment growth relative to other states, exactly as Mr. Brownback said it would. The increase is shown by the acceleration in employment (acceleration is the percentage change in the year-over-year growth rate). In Kansas, employment growth accelerated by 31%, much better than most other states.
As mentioned, it’s still early, but the early evidence certainly appears to be in Kansas’ favor – tax cuts are boosting employment growth (it just takes time for the investment to pay off).
| Employment Growth | |||
| State | 2013 (Avg. Y/Y Growth) | 2014 (Avg. Y/Y Growth) | Acceleration |
| Wyoming | 0.17% | 1.19% | 587% |
| Arkansas | -0.02% | 1.08% | 398% |
| Pennsylvania | 0.26% | 0.80% | 211% |
| South Dakota | 0.84% | 1.38% | 64% |
| Kentucky | 1.06% | 1.59% | 50% |
| New Hampshire | 0.85% | 1.26% | 48% |
| Georgia | 2.06% | 3.02% | 47% |
| Oregon | 1.92% | 2.77% | 44% |
| Alaska | 0.35% | 0.47% | 35% |
| Nevada | 2.58% | 3.44% | 33% |
| Vermont | 0.78% | 1.03% | 32% |
| Kansas | 1.16% | 1.52% | 31% |
| Tennessee | 1.59% | 2.08% | 30% |
| Wisconsin | 1.02% | 1.32% | 30% |
| South Carolina | 1.95% | 2.52% | 29% |
| Florida | 2.51% | 3.23% | 28% |
| Indiana | 1.23% | 1.52% | 24% |
| North Carolina | 1.77% | 2.11% | 19% |
| Washington | 2.37% | 2.78% | 18% |
| Alabama | 0.93% | 1.09% | 18% |
| Illinois | 0.95% | 1.11% | 17% |
| Nebraska | 1.18% | 1.34% | 14% |
| North Dakota | 3.42% | 3.85% | 13% |
| Colorado | 2.99% | 3.32% | 11% |
| New York | 1.52% | 1.68% | 11% |
| Ohio | 1.25% | 1.36% | 9% |
| Maryland | 0.86% | 0.91% | 5% |
| New Mexico | 0.84% | 0.86% | 3% |
| Idaho | 2.54% | 2.61% | 3% |
| Texas | 3.01% | 3.07% | 2% |
| Louisiana | 1.39% | 1.41% | 1% |
| Rhode Island | 1.30% | 1.29% | -1% |
| Delaware | 2.21% | 2.20% | -1% |
| Iowa | 1.29% | 1.28% | -1% |
| California | 3.22% | 3.05% | -5% |
| Massachusetts | 1.73% | 1.62% | -6% |
| Mississippi | 0.81% | 0.75% | -7% |
| Connecticut | 0.79% | 0.73% | -7% |
| Missouri | 0.94% | 0.86% | -8% |
| Utah | 3.23% | 2.95% | -9% |
| Michigan | 1.87% | 1.70% | -9% |
| Oklahoma | 1.31% | 1.16% | -12% |
| Minnesota | 1.70% | 1.41% | -17% |
| Arizona | 2.34% | 1.92% | -18% |
| Maine | 0.60% | 0.47% | -23% |
| Virginia | 0.71% | 0.45% | -36% |
| New Jersey | 1.16% | 0.70% | -39% |
| Hawaii | 2.04% | 1.07% | -47% |
| Montana | 2.01% | 1.01% | -50% |
| West Virginia | -0.20% | -0.38% | -289% |
Conclusion
Overall, early evidence on the Kansas tax experiment appears generally positive. As anticipated, corporate and individual income tax revenue is down from the prior year. This occurs because it takes time for tax cuts to work their way through the economy.
At the same time, employment growth in the Sunflower State is accelerating, with employment acceleration the 12th highest among all states in 2014.
It’s still too early to address statistical causation, but early evidence points towards Mr. Brownback’s favor. His tax cuts are boosting employment growth, with revenue taking some time to pay back on the investment.
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