December 18, 2012

The American Independent: Arthur Laffer’s dynamic roadshow

On January 19 of this year, Kansas state Sen. Julia Lynn offered an exuberant greeting to renowned tax-cutting enthusiast Arthur Laffer. “What an honor and privilege to have you here in Kansas,” Lynn said, welcoming the fabled former Reagan economic advisor to an informational meeting of the senate’s assessment and taxation committee. Les Donovan, the committee chair, raised the roof for their “special guest who has proven expertise in the field of economics going back decades.”

Basking in the dynamic glow of Laffer’s supply-side prestige, Lynn, Donovan, and their Republican colleagues hoped he would offer his blessing for a plan that would slash income taxes and eliminate a number of tax credits and deductions, per the wishes of Gov. Sam Brownback.

But Democrats like Kansas Sen. Tom Holland weren’t buying it. Holland didn’t think it made much sense to compare Kansas’ untapped economic potential to that of other no-income-tax states like Texas and Alaska—the sort of analytical flourish typical of Laffer. “I think it’s a false analogy,” said Holland during the hearing, which was reported on at the time by the Wichita Eagle. “I think trying to make this argument that we can wean ourselves off of an income tax and expect these types of growth, that are in fact driven by resources that are outside of our control, I think that’s a pure fallacy.” Donovan quickly shut him down. “I don’t want any more of those” kinds of questions, he said. “We’ve had this discussion but that’s the last one I’m going to allow.”

Through his work for the American Legislative Exchange Council (ALEC) and a host of other outlets, Laffer’s prescriptions have gained purchase in several tax debates around the country, including in Missouri, Oklahoma and Tennessee.

The godfather of supply-side economics, Arthur Laffer’s core conviction is simple: high tax rates discourage entrepreneurs from investing and growing the economy, ultimately depressing tax revenues. His legendary, eponymously named Laffer curve suggests a simple solution: tax cuts that, in the words of the Laffer Center For Supply-Side Economics, “may increase taxed activity and raise more revenue than otherwise predicted.” The Laffer Center says that it’s “possible” the economic effects of a tax cut, especially when tax rates were previously very high, will cause “an actual increase in tax revenue.” But Laffer does acknowledge that the theory does not mean that “all tax cuts pay for themselves.”

Meanwhile, the Congressional Research Service recently reissued a report—initially pulled after complaints from Congressional Republicans—finding that reductions in the top tax rate have little impact on economic growth, saving, investment, or productivity growth. And as the now-ostracized former Republican budget official Bruce Bartlett has argued, riding the Laffer curve to the extreme—lowering taxes in every circumstance regardless of their current rate—is a favorite pastime for fiscal conservatives. “While no economist denies the theoretical possibility of a revenue-raising tax cut or revenue-losing tax increase, Republicans talk as if the United States is always on the high side of the Laffer curve—no matter what the tax rates are—so every tax cut will pay for itself and no tax increase could possibly ever raise net revenue and thus reduce the deficit,” Bartlett wrote earlier this year.

Conflicting evidence notwithstanding, Laffer is enmeshed with state policy, co-authoring think tank reports and testifying before legislatures to promote low tax, loophole-closing plans. He evangelizes his policy ideas through several bodies, including the non-profit Laffer Center; Laffer Associates and Arduin, Laffer, and Moore Econometrics, a pair of economics research firms; ALEC; and the opinion pages of The Wall Street Journal.

Carl Davis, a senior analyst with the Institute on Taxation and Economic Policy, a frequent critic of Laffer, says that Laffer has been strategic in where he takes his talents. “In a lot of cases, he’s not doing anything other than telling people what they want to hear,” Davis says. “He’s putting specific numbers behind the ideological talking points that conservative lawmakers would be using … he’s just willing to go out there and make much bolder claims.”

Last year, Kansas welcomed Laffer—dubbed a “celebrity tax policy consultant” by the Wichita Eagle—offering him a $75,000 contract to secure his economic wizardry. Signed in July 2011, the contract stipulated that Laffer Associates would consult with Kansas officials on tax reform proposals and could be asked to make media appearances on behalf of the department of revenue. His consultation duties included “confirming the economic validity of current reform proposals where appropriate” and recommending potential changes.

In January, Laffer told Kansas lawmakers that Brownback was on the right track, as the Topeka Capital-Journal reported. “If it continues in the direction that he’s going, I think you can really create a state of prosperity here in Kansas,” Laffer said. “I really believe that based on my research, my work and my personal feelings. I know the future is always more uncertain than the past, and I’m trying to do all I can to use the lessons of the past as a guidepost for the future.”

With Laffer’s help, the Kansas legislature crafted a measure that lowered rates across the board, reduced the number of individual tax brackets from three to two, and phased out a number of tax credits and deductions, known collectively as tax expenditures. The bill also totally exempted some business income that had been subject to the individual income tax—income reported by LLCs, S Corps, and sole proprietorships—eliminating state income taxes on over 191,000 small business owners, according to a release issued at the time by the governor’s office. Brownback’s office also announced that “dynamic projections” showed the law would create nearly 23,000 new jobs, inject $2 billion in disposable income back into the state, and increase its population by almost 36,000.

Lynn, the newly elected assistant majority leader of the Kansas senate and chair of the commerce committee, says that the bill was a response to potential cuts to federal aid. “Knowing that we were going to be faced with cutbacks from the feds, this is basically a response to protect ourselves,” Lynn said in an interview with The American Independent.

Many of the expenditures eliminated in the bill, however, benefit working families and the poor, including a rebate for the food sales tax, and credits and deductions for child and dependent care, and child day care. As the Capital-Journal reported, Gov. Brownback, with Laffer’s support, also proposed cutting the state-level version of the earned income tax credit, claiming it was plagued by fraud. But the credit was spared in the bill signed into law.

The repeal of the food tax rebate makes Kansas just one of three states to tax groceries at the normal sales tax rates, without offering any offsetting tax relief to low-and moderate-income families, according to the Center on Budget and Policy Priorities’ Robb Gray.

Without the rebate, a family of four making $17,000 will lose $294, while a single parent who makes $12,000 and has two children will lose $246 a year—a little more than two percent of their income, according to ITEP.

Lynn says that lawmakers just didn’t have enough information about the impact of cutting the tax expenditures in question. “There’s a question as to whether or not we even have the [information technology] ability to get at this data,” Lynn says, adding that legislators did not know who benefitted from the credits, and what other types of government assistance they were receiving.

“Nobody wants to hurt anybody. I don’t think that we’re in a position where we have to hurt people. … Are we getting the kind of information we need as elected officials to make determinations that are not going to hurt people, but achieve our goals?”

Perhaps to get that information, Kansas turned to Laffer, a controversial figure whose theories on tax policy have fueled economic debates between conservatives and liberals for decades. Rich States, Poor States, his ALEC study written in collaboration with Stephen Moore and Jonathan Williams, is “basically a 15-item wish list of conservative tax and budget policies,” ITEP’s Carl Davis says. On that list are low or nonexistent income, estate, and property taxes; low minimum wage; and the passage of right-to-work bills like the controversial measure just signed into law in Michigan by Republican Gov. Rick Snyder.

Those policies, Laffer insists, spark the sort of explosions in population, economic growth, and revenue seen in some states with conservative tax regimes. But according to his sparring partners at ITEP, Laffer’s claims don’t add up. Measured on a per capita basis, economic growth in “high rate” states is at least as good if not better than in those without an individual income tax, ITEP found:

Chart by the Institute on Taxation and Economic Policy

And according to ITEP, while the inflation-adjusted median family income has shrunk in most states over the past decade, it has receded less quickly in the high-rate states.

The Institute’s Carl Davis says there is no question that states with no or low income taxes are experiencing faster population growth than those with higher taxes. But “that fact alone doesn’t tell us much. There’s a huge range of reasons why people decide to live in various places. Family, weather, where they grew up.” Americans also tend to move to areas that are less dense, and where housing is cheaper as a result. “If you were to track down any serious demographers, they would not put income tax policy at the top of the list,” Davis says.

The problem, Davis argues, is Laffer’s tendency to attribute economic growth in the states that adopt his policy recommendations largely to those policies—selling correlation as causation. Other, non-tax related growth factors simply don’t rate in his eyes.

Case in point: Tennessee is one of nine states without an income tax. But until recently, it did exact taxes on gifts and estates. Had Tennessee moved to eliminate those taxes a decade earlier, Laffer calculated, it would have created between 200,000 and 220,000 new jobs; expanded its economy by 14 percent; and produced at least $7 billion in additional state and local revenue, helping it bridge the economic gap between itself and income tax-less states like Alaska, Wyoming, and Florida.

But Alaska and Wyoming’s growth, Davis argues, is largely based on their energy and mining sectors, while Florida’s comes from tourism. Empirical questions aside, in its most recent legislative session, Tennessee voted to phase out the estate tax within four years and eliminate its gift tax.

Back in Kansas, Sen. Tom Holland tried to raise these issues. “The point I was trying to get out there was that … there’s no study at all that shows that a state, by manipulating its marginal income tax rate, can affect their economic growth,” he says, adding that he does not expect Republicans in Kansas to reverse any of the income tax cuts passed. “You have a Republican legislature that’s hell bent on slashing income taxes. That’s just where they’re at.”

The question for Republicans in the upcoming session will be how to pay for those cuts. Gov. Brownback says the legislature should find a way to fill the $705 million budget gap inflicted by the tax cuts, while preserving funding for education, public safety, and health services for the poor, according to a recent story by the Kansas City Star. “Those are the protected categories,” Brownback promised at a public forum last week. But the story also suggested that Brownback and his allies expect a “short-term dip in tax revenues will eventually be replaced with revenues created by economic growth spurred by the tax cuts” — a win for Laffer.

Laffer also made a splash in Oklahoma, albeit with less success. There, his econometrics firm—Arduin, Laffer & Moore—partnered with the conservative Oklahoma Council of Public Affairs to author a detailed plan that served as the basis for several tax-cutting bills.

David Blatt, the director of the progressive Oklahoma Policy Institute, says that local business councils, the state Republican caucus, and Gov. Mary Fallin—who wrote the foreword to the most recent edition of Rich States, Poor States—all initially accepted Laffer’s two-part plan “hook, line, and sinker.” The first stage would have reset the top rate from 5.25 to 3 percent, paying for it by zeroing out all individual income tax exemptions, deductions, and credits, including those that benefit the working poor. The second phase would be rolled out gradually, lowering the top rate an additional quarter of a percent each year, eventually eliminating the income tax entirely by 2022. According to the proposal, “Due to the greater economic incentives directly attributable to the tax reform, the total revenue losses to the state would not be as large as static revenue estimates would indicate.”

The idea proved influential, with four Oklahoma senators co-authoring legislation “to implement the plan proposed by legendary economist Dr. Arthur Laffer.” Gov. Fallin’s own plan resembled Laffer’s, cutting the top rate to 3.5 percent in 2013, condensing the number of brackets from seven to three, and zeroing out or lowering income taxes for couples with a combined annual salary of up to $70,000. Her plan also eliminated $200 million worth of tax credits. Eventually, Fallin’s plan would have eliminated the state’s income tax entirely.

Despite bearing Laffer’s imprimatur, the plans failed to win passage. In a poll conducted in May for the Oklahoma Policy Institute, 42% of voters opposed decreasing the state income tax and paying for it by eliminating tax credits, including the child tax credit and the sales tax relief tax credit. Opposition climbed to 70% when voters were told that the plan could increase taxes for most families with children and seniors earning less than $50,00 a year. Fifty-nine percent of Republicans in the state also strongly opposed such a plan.

“That’s where a combination of Midwestern common sense and pretty strong pushback from other economists … basically called bullshit on that sort of trend,” Blatt said, adding that Fallin invested significant political capital pushing the tax cuts through last year, and isn’t in the best shape to revisit the issue this year. “We expect that that she will talk about income tax cuts, but we don’t know how seriously she’s going to pursue it,” Blatt says.

The Oklahoma Council of Public Affairs, meanwhile, remains committed to tax reform. In an email to The American Independent, Tina Korbe, the group’s policy impact director, writes that the state income tax is destructive, and that killing it will help grow the state’s economy. “The approach within the state legislature on the tax cut issue may change from year to year. But we will keep pushing the idea that any steps to truly lower the tax burden on Oklahoma citizens and job creators will work out positively for our state,” she adds, noting that OCPA’s collaboration with Laffer has paid big dividends. “We take great pride in our association with Dr. Laffer and are optimistic that his involvement in our state will continue.”

Just last month, the business-subsidy tracking group Good Jobs First teamed up with the progressive Iowa Policy Project to test Laffer and ALEC’s claims. Their study argued that Laffer’s policy prescriptions frequently failed to stimulate job markets. The study also provided further support to the argument that people do not relocate based on tax rates.

Meanwhile, Carl Davis expects Laffer to play at least a supporting role in North Carolina, where Republicans wrested control of the governor’s mansion away from Democrats this year. Laffer and Steven Moore teamed up with the Civitas Institute, a prominent conservative think tank in North Carolina, to publish “Taxes Really Matter: Look at the States,” an analysis of state income taxes. The study took particular aim at ITEP, and pushes many of the ideas that have become synonymous with Laffer’s state policy activism.

Now, armed with a supermajority, North Carolina Republicans have little blocking their way to implementing a full-on supply side agenda.

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