Experiences from the John Locke Foundation
and Kansas Policy Institute
In the past two years, 32 states have given financial relief to families in their states by reforming taxes. Even with these tremendous gains, 2015 is shaping up to be one of the biggest years for tax relief. Last November, voters in over a dozen states retained tax reformers and booted tax-and-spend leaders. To help other states ride this wave of opportunity, reformers in North Carolina and Kansas are sharing lessons learned from past experiences.
North Carolina’s Surge to Sixteen
By Becki Gray,
John Locke Foundation
Tax reform is tough. It’s not just figuring out ways to get additional revenue. Reform worth doing results in a fairer, simpler, transparent, predictable and pro-growth system. It should spur the economy and help people get back to work and become less dependent on government.
Beginning in 2011, new leadership in North Carolina adopted bold ideas set forth by the John Locke Foundation and implemented transformational tax reform. They allowed a regressive sales tax increase to sunset, lowered and flattened the personal income tax, set about lowering the corporate tax rate, and eliminated the death tax. Despite aggressive and vicious attacks from the Left, particularly during a national high profile election, they held firm, armed with clear economic policies of lower taxes and free market principles.
Now North Carolina has moved from 44th in the Tax Foundation’s Business Tax Climate Rankings to 16th. At 5.5 percent, our unemployment rate is the lowest since April 2008. Over 114,500 net new jobs have been created in just the last year and over 300,000 since mid-2011. North Carolina’s recovery is faster and stronger than the nation’s and that of our Southeastern neighbors.
Tax reform works when it’s done right. That’s where these strategies can help:
1. Understand why it’s needed. Change in leadership? Everyone knows conservatives are for lower taxes? Neighbors are doing it? The reason to tackle tax reform is for the economic prosperity it brings. Hundreds of academic studies tell us that lower taxes lead to economic growth, which leads to job creation. People with jobs are able to provide for their families, invest their money, and enjoy freedoms as they choose. Opportunities grow instead of the size and scope of government.
2. Watch out for friends. As with any changes, tax reform creates winners and losers. Stakeholders and special interests will go to great lengths to hang on to special treatments. They will lobby, cajole, bully, beg and not always provide the whole story. Remember: tax reform is not about special favors but about treating all taxpayers fairly. As a state-based think tank, you are the best source for data and ideas based on sound free market economic policies.
3. Be bold and be focused. Changes have to be drastic enough to make a difference. Any expansion of the tax base must be tempered with lower rates. Reforms should be difficult to unravel and discourage big government spenders from undoing the good that comes with thoughtful reforms.
4. Vet. Reform will work only if is based on reality, not rhetoric. Facts, data, and sound analysis are key, as is input from businesses, communities, and a wide variety of tax payers. Seek proven best practices from other states, while also recognizing that your state is unique. Be armed with the facts—you’ll need them when the Left attacks.
5. Give it time. Changes to a tax system have to be cycled in. Revenue projection models and taxpayer behavior will change to adapt to the changes, which will take 18–24 months for full implementation. Although some immediate benefits will be realized, long-term economic growth and prosperity are the goal. Decision makers need help from thought leaders to see it through the short-term pain.
It’s worth it.
Kansas’ March to Zero
By Steve Anderson
Kansas Policy Institute
Between 1998 and 2013, average private sector job growth among the 50 states was eight percent. States that didn’t tax income grew by 18.3 percent while states that did tax income grew only 5.6 percent. Kansas trailed at only 3.9 percent. The state’s population had shrunk over the last 50 years in relation to the rest of the country, and Internal Revenue Service migration data showed residents were leaving and taking significant wealth with them—a net outflow of over $3.8 billion from 1993 to 2010.
Kansas Governor Sam Brownback had a decision to make. Would he “shuffle the chairs” as prior administrations had or take bold action to change the dynamic? His choice was to embrace the notion that taxing production was counterproductive and transition to a consumption based tax model.
The course he set is called the March to Zero and is ultimately designed to completely eliminate the individual income tax. Even though it will take some time to realize the full impact of these tax reform efforts, Kansas has seen success by embracing a few key lessons so far:
1. Reduced taxes should come with reduced spending. The reduction need not be anywhere near dollar-for-dollar, but it is imperative to reset the baseline for government growth in expenditures.
2. Income tax reduction won’t prompt other tax increases. Even though the Left has learned to raise the spectra of increased property taxes that any income tax reduction might “create,” the data in Kansas reinforces that it is a faux argument. In fact, tax reform can have a positive impact on government revenues. After the state’s income tax reduction, sales tax revenues increased in cities and counties. The majority of those governmental units saw significant upswings as funds remained in taxpayers’ pockets and were spent locally.
3. Success requires compelling messaging. Advocating for tax reductions using phrases like “putting a bloated government on a diet” works well with the fiscal conservative base, but it does not persuade those who are on the fence. In his last State of the State Address, Kansas governor Sam Brownback appealed to voters by emphasizing the widespread benefits of income tax reform:
“First, the family budget is more powerful than the government budget. Second, a growing economy that is adding private sector jobs and increasing personal income can fix a government budget. A growing government budget cannot bring lasting prosperity to its citizens by appropriating ever more of their earnings. If we could spend our way to paradise, we would already be there.”
Becki Gray is vice president of outreach at the John Locke Foundation. Write her at email@example.com. Steve Anderson is Kansas Policy Institute’s senior adjunct fiscal policy fellow. Contact him at firstname.lastname@example.org.