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State Fiscal Policy Holds High Stakes for Low-Income Families

By Toby Eckert

This is a critical time for states and for low-income families that rely on vital services and supports funded by state budgets. Policymakers in several states are engaged in a real-time test of tax and budget policy, and the outcomes will have crucial implications for low-income families and their advocates not only in those states but possibly nationwide. Conservative governors and lawmakers, who took or consolidated power in several states after the 2010 elections, have embarked on an agenda of unprecedented tax cuts that are draining revenue at an alarming rate in some states and limiting funding for schools, early education, health care, colleges and universities, and safety-net programs. They are taking their cues from powerful, well-funded corporate and ideological interest groups such as the American Legislative Exchange Council (ALEC), which has pushed cookie-cutter legislation for tax cuts that favor the wealthy, spending cuts that hurt working people, and a host of other policies generally detrimental to low- and middle-income Americans.

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These high stakes demonstrate that all advocates need to fight for robust revenues and sound budget decisions in their states.

Other states have moved in the opposite direction. They have bolstered their revenues with modest, targeted tax increases that allow them to invest in services and programs that are vital to working families and low-income households. California and Minnesota, for instance, have raised taxes for those most able to afford it and, with the revenue, replenished education, child care, and other services that were cut during the Great Recession. So far, they have suffered none of the dire economic consequences that tax-cut advocates predicted. In many ways they are faring better than their tax-cutting counterparts, such as Kansas, North Carolina, and Wisconsin. The stakes everywhere are high. The fortunes of working people, children, and those struggling just to get by are on the line. These high stakes demonstrate that all advocates need to fight for robust revenues and sound budget decisions in their states.

ALEC’s Agenda Pushes Damaging Tax and Budget Policies

ALEC is at the forefront of the most damaging tax and budget policies being pushed in the states. Founded in 1973 by a group of right-wing stalwarts including Paul Weyrich, the cofounder of the Heritage Foundation, and then-Illinois state Rep. Henry Hyde, ALEC is a coalition of corporate lobbyists, antigovernment activists, and conservative lawmakers. The coalition drafts and promotes “model legislation” for states. Its agenda is shared by Grover Norquist’s Americans for Tax Reform; Charles and David Koch’s Americans for Prosperity; and the State Policy Network, a group of conservative policy shops such as the Texas Public Policy Foundation, the Maine Heritage Center, the Goldwater Institute in Arizona, and Michigan’s Mackinac Center for Public Policy. The following are at the heart of ALEC’s agenda:

  • Deep tax cuts, especially for corporations, investors, and the wealthy—this may entail the elimination of state income and estate taxes and always results in less funding for schools and other public services.
  • Shifts in responsibility from the wealthy to the poor and middle class for paying the bulk of taxes—this means special treatment for investment income, a change from income taxes to unusually high sales taxes (which more harshly affect lower-income families), and an elimination of tax-based supports, such as the state-level earned income tax credit (EITC) for the working poor.
  • Rigid revenue limits, such as a harsh constitutional constraint known as “TABOR” (taxpayer bill of rights) and requirements that revenue-raising legislation be backed by an unusually large “supermajority,” rather than a simple majority, of lawmakers—for states, these measures make more difficult ensuring that public schools, health care, child care, and other services have the necessary funding.1

Kansas Struggles After Massive Tax Cuts

ALEC’s biggest success has been in Kansas, where prominent ALEC spokesman Arthur Laffer, the father of “supply-side” economics, designed a package of massive income tax cuts the state legislature passed in 2012. The cuts were among the largest, in percentage terms, that any state had ever enacted in a single year. Kansas also became the first state to eliminate taxes on business profits that are “passed through” to their owners, rather than taxed at the corporate level. The reductions were premised on Laffer’s discredited claim that tax cuts will unleash a torrent of economic activity.2 Facing a huge revenue shortfall that threatens funding for schools, health care, and other vital programs, Kansas has become the poster child for misguided and damaging fiscal policy. Rather than being the “shot of adrenaline into the heart of the Kansas economy” that Gov. Sam Brownback promised, the tax cuts have acted more like a tranquilizer, if not a lethal injection.3

While most states are finally starting to see a sustained revenue recovery that allows them to begin reinvesting in education and other services after the Great Recession’s devastation of their finances, Kansas is moving in the opposite direction. Between June 2013 and June 2014, Kansas’s tax revenue plunged by 11 percent overall; income tax revenue dropped by more than 20 percent.4 The state is getting by on operating reserves, and when those are gone, Kansas will be forced to make emergency cuts in state services or raise new revenue. Any cuts would come on top of recent deep cuts in its schools and other services.5 Indeed, many services are already being limited.6 The only homeless shelter in an 11-county region of southeastern Kansas closed its doors after losing half of its state funding.7 “Kansas government is starving, and politicians are going to have to contemplate the unthinkable—a rollback of the draconian tax cuts that never should have been passed,” the Kansas City Star recently concluded.8

Besides paying a price in reduced services, low-income families in Kansas are paying directly out of their pockets. That is because the tax cuts overwhelmingly favored wealthy households. Combined with other tax changes, the average low-income household was expected to pay an additional $148 per year in taxes, while the wealthiest 1 percent of households would get an average tax cut of $21,087 per year.9 There is no evidence that the tax cuts have stimulated Kansas’s economy. In the year after the tax cuts took effect, at the beginning of 2013, Kansas added jobs at a pace modestly slower than the country as a whole.10

Rather than being the “shot of adrenaline into the heart of the Kansas economy” that Gov. Sam Brownback promised, the tax cuts have acted more like a tranquilizer, if not a lethal injection.

Kansas’s struggles should not come as a surprise to anyone. The tax cuts were predicated on an economic theory that tax cuts pay for themselves by stimulating economic activity and generating new revenue—a theory which has been discredited at the national level.11 Laffer and ALEC’s state fiscal policy prescriptions do not lead to stronger economic growth.12 Analyses by ALEC to justify its agenda have been found repeatedly faulty and misleading.13 While Governor Brownback claimed that the tax cuts would “pave the way to the creation of tens of thousands of new jobs, bring tens of thousands of people to Kansas, and help make our state the best place in America to start and grow a small business,” no serious evidence supports claims that tax levels determine state economic growth.14 Most academic studies of the topic conclude that state tax levels have a minor impact on job creation and other economic activity.15 Arizona, Ohio, and Rhode Island—three of the six states that enacted big personal income tax cuts before the Great Recession—saw their economies grow more slowly than the nation’s in subsequent years. The other three—Louisiana, New Mexico, and Oklahoma—had above-average growth, but all are major oil-producing states that benefited from sharply higher oil prices.16

Progressive States Take a Turn to the Right

Kansas was not alone in its zeal to embrace tax cuts. Following the 2010 election, newly elected conservative governors and legislatures in several states, notably North Carolina and Wisconsin, pursued a similar strategy. There, too, the results have harmed services and programs that bolster low-income families and promote widespread prosperity; promises of an economic boom have turned out to be empty.

North Carolina went from having a progressive income tax, with rates that ranged from 6 percent to 7.75 percent depending on the taxpayer’s income to a flat tax of 5.75 percent. Lawmakers also lowered corporate taxes, repealed the estate tax, and allowed the state’s EITC for low-income working families to expire, thereby becoming the first state ever to abolish the credit. The EITC elimination was a particularly hard blow to low-income families—it meant a tax hike for 900,000 working households, most with children to support. The federal EITC is one of the nation’s most effective poverty-fighting tools, and state versions of the credit strengthen the federal credit. The tax credits not only help families working for low wages meet basic needs but also reduce poverty, especially among children. These benefits can be long-lasting: low-income children in families that get additional income through programs such as the EITC do better and go farther in school, and work more and earn more as adults.17

The EITC elimination was a particularly hard blow to low-income families—it meant a tax hike for 900,000 working households, most with children to support.

As in Kansas, North Carolina’s tax package favored the well-to-do at the expense of lower-income taxpayers. While households earning more than $76,000 will pay less as a share of their income in state and local taxes, those earning below $29,000 will pay higher taxes.18 The impact on state resources has been similar to Kansas: $680 million less revenue for the current tax year (2014), 43 percent less than originally anticipated.19

The turn of events in North Carolina is particularly striking in view of the state’s well-earned reputation as an economically and fiscally progressive outlier in the South. For most of the past century, North Carolina invested heavily in schools, roads, and other public services and rejected the low-tax, low-investment path followed by its neighbors. However, the extremely conservative policymakers who swept to power in 2010 and won the governorship in 2012 not only slashed taxes but also rejected Medicaid expansion and sharply reduced unemployment benefits.20 North Carolina was also one of only eight states to cut higher-education funding last year.21

As much as North Carolina was a progressive beacon in the South, Wisconsin had long filled a similar role in the Midwest. In a repeat of the Kansas and North Carolina pattern, Wisconsin too has taken a right turn on fiscal policy. Wisconsin lawmakers cut taxes 43 times over the past three years, draining $1.9 billion in revenue for schools and other priorities over that period.22 As in Kansas and North Carolina, those tax cuts largely benefited the wealthy: the bottom 20 percent of income earners (who make $14,000 a year, on average) will get an average tax break of just $48 in 2014. Those earning around $30,000 will get a $109 tax break and the top 1 percent of earners (with an average income of $1.1 million) will get a break of $2,518.23 Wisconsin also has been reducing its investments in schools and higher education, and providing health insurance to fewer low-income parents. Wisconsin’s school spending in 2013–2014 was down $1,038 per pupil from 2008, a drop in size second only to Alabama. Larger class sizes, reduced hours for educational assistants, delayed or canceled textbook purchases, and cuts in remedial reading programs have resulted.24 The jobs bonanza that Gov. Scott Walker said would result from the tax cuts and his other policies has failed to materialize. While Governor Walker had pledged to create 250,000 private-sector jobs in his first term, the state added only 91,813 such jobs by the third year of his four-year term. Wisconsin ranked 35th among the 50 states in private-sector job growth from 2010 to 2013; it trailed all of its bordering neighbors—including Illinois, a state that Governor Walker had chided for raising income taxes and alleged had a reputation for being unfriendly to business.25

The jobs bonanza that Gov. Scott Walker said would result from the tax cuts and his other policies has failed to materialize.

Minnesota and California Show a More Promising Path

Indeed, as Governors Walker and Brownback and likeminded lawmakers continue to cheerlead for tax cuts, states that have gone in the opposite direction are setting an example of fiscally responsible public investment and seeing strong economic growth, belying the supply-side claims of Laffer and ALEC.

Perhaps no state made as sharp a turn as Minnesota. During the 2011 and 2012 legislative session, advocates for low-income families, labor unions, and faith organizations had to fight hard to block a series of proposed amendments to the state’s constitution; the amendments would have made raising enough resources for investments in education, transportation, health care, and the other building blocks of a strong economy virtually impossible. Despite long odds, the antiamendment coalition succeeded in keeping the measures off the ballot. The next year, on the offensive, the same coalition worked with a newly Democratic legislature to pass a bold revenue plan featuring a tax increase on high-income residents and eliminating a costly corporate tax preference. The package closed a $1.1 billion state budget deficit and funded overdue investments in schools—including all-day kindergarten and early childhood educational scholarships for at-risk children—as well as measures to make college more affordable, to create jobs, and to boost funding for other public services. Despite conservative lawmakers’ and commentators’ predictions of economic doom, Minnesota is among the 10 states with the lowest unemployment rates (4.3 percent in August).26

California is another state where, without any of the grave economic consequences predicted by ALEC and others, higher taxes have improved the lives of low-income adults and children. In November 2012 California voters approved tax increases, including an income tax boost on the wealthy; the tax increases helped boost revenue up by more than $18 billion in 2013. The budget recently passed by the California Legislature funds preschool for children from poor families, increases welfare grants, and continues expanding health care under the Patient Protection and Affordable Care Act.27 Despite the critics’ warnings that the tax increases would drag California’s economy back into recession, the state is booming. The same year the tax increases took effect, California added over 400,000 jobs. In fact, the shot of adrenaline that Governor Brownback promised in Kansas appears to have been delivered to the Golden State instead. Since December 2012, the month before Kansas’s tax cuts took effect, California has seen private-sector job growth of 4.3 percent.28 Kansas’s corresponding job growth has been just 2.3 percent.29

Advocates Can Work Together to Make the Pie Bigger

The lesson for advocates fighting poverty and going to bat for low-income families—from both the antitax states and their progressive counterparts—is clear: tax and spending policies need to be monitored closely and fully integrated into the advocates’ broader strategies. To mix metaphors a bit, just as a rising tide should lift all boats, a shrinking pie is likely to leave everyone that much hungrier. And when people are hungry, they tend to fight over the scraps. A better approach would be for advocates to join together, as they did in Minnesota and California, to make a bigger pie for everyone. Broad coalitions—consisting of labor unions, the religious community, food banks, and housing advocates—are a key to success. While protecting programs and services from unnecessary cuts, they can be a formidable force for ensuring that revenues are high enough to meet the needs of their various constituencies.

In a recent joint commentary, Nan Madden of the Minnesota Budget Project and Annie McKay of the Kansas Center for Economic Growth, leaders of two nonpartisan fiscal research and advocacy groups, asserted:

We and many others in Kansas and Minnesota share a strong understanding of how important state tax and budget policy is to the work of helping people get to the middle class and not fall back down. How our states raise and spend money is a statement of values and has a huge impact on people’s lives.… Without adequate revenue, no program or service is safe from cuts or outright elimination. And even in states that have committed to raising more revenue, there’s more to do so that adequate dollars go where they are most needed.30

Toby Eckert

Senior State Fiscal Policy Editor

Center on Budget and Policy Priorities

820 First St. NE Suite 500

Washington, DC 20002

202.408.1080

eckert@cbpp.org

3 Sam Brownback, Tax Cuts Needed to Grow Economy, Wichita Eagle, July 29, 2012.

13 Williams & Johnson, supra note 1.

14 Brownback, supra note 3.

28 Center on Budget and Policy Priorities analysis (unpublished) of U.S. Bureau of Labor Statistics, State and Metro Area, Employment, Hours and Earnings (n.d.).

29 Id.

30 Nan Madden & Annie McKay, To Fight Poverty, Fight Budget Battles, Spotlight on Poverty and Opportunity (Sept. 23, 2013).

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