Kansas elected a governor named Sam Brownback in 2010. He cut income tax rates, promising faster economic growth. It didn’t work out, and now he’s in a close race for re-election. Last summer over at Econlog I focused on the absurd claim that these income tax cuts should be expected to raise revenue. (Not sure who made them, either actual supply-siders, or liberals like Paul Krugman fantasizing about nutty supply-siders.) In any case, there is virtually no way a state income tax cut cut could boost state income tax revenue, given how low state MTRs are compared to federal MTRs. Indeed in my Econlog piece I pointed out that the total top MTR in Kansas rose dramatically under Brownback, due to the Obama tax increases.
But the top rates rose even more in other states, so why didn’t Kansas do a bit less bad? I’m not certain, but I think people tend to expect too much from slight tinkering with taxes and spending. Supply-siders have no one but themselves to blame when they oversell a policy. I wouldn’t blame the Kansas voters for dumping their governor.
To get a better perspective on what’s wrong with Kansas, let’s compare it to the other 5 states in the center of the country. Foreign readers know about Texas, but stacked on top are 5 boring, anonymous, rectangular-shaped states. These cover the Great Plains, a desolate windswept prairie with cold winters and hot summers. Nothing like the south of France. Basically there is no reason that any sane person would want to live in any of those 5 states.
[I can cop a superior attitude because I grew up in more sophisticated Wisconsin. Which has trees. And lakes. Even as we midwesterners resent the condescension of the coastal elites, we develop our own pecking orders, our own prejudices.]
Here is data I found for state government spending as a share of gross state product in fiscal 2015, for the Great Plains states (north to south):
North Dakota: 16.6%
South Dakota: 13.9%
Notice that Kansas is the big spender, even after Brownback. By comparison, California is 18.1%. (Is this data accurate?)
It’s hard to know which of America’s states is the least well known. Texas is famous. Oklahoma was a musical. Kansas had The Wizard of Oz. Nebraska has Warren Buffett. And North Dakota is newly famous for “the Bakken.” The only thing marring South Dakota’s prefect blandness is Mt Rushmore.
I would also say that South Dakota has the least going for it. Three of those states have oil, and Kansas has some affluent suburbs of Kansas city, without the inner city poverty. Nebraska has slightly better farmland. And yet by some miracle, South Dakota is booming. Here’s The Economist, in an article titled “Quietly Booming: How a neglected state is succeeding”:
Quiet success might be South Dakota’s motto. It has no oil industry; its neighbour North Dakota, with its shale-oil boom, gets all the notice. It has no large military base. There is not even an influential university. Yet South Dakota’s 3.7% jobless rate is the third-lowest in America. The rate is even lower in Sioux Falls, which has the fourth-fastest-growing economy in the country.
The state economy used to rest on farming, but today hospitals and financial companies are among the chief employers. The change began in 1980 when the state enacted financial reforms, prompting Citibank to move its credit-card business there. So many banks followed that the state now has more bank assets, $2.76 trillion, than any other, including New York.
Manufacturing and biotech are thriving, too. Last year Marmen, a French-Canadian wind-turbine manufacturer, opened its first American plant not far from Sioux Falls. Bel Brands, the American arm of a French dairy company, has also invested in the state. South Dakota sits usefully in a nexus of north-south and east-west interstate highways. There is also a decent labour pool. Many workers are little more than a generation from the farm: absenteeism is low, and the unions insignificant.
Taxes are attractively low. South Dakota has no state income tax, personal-property tax, inventory tax or inheritance tax (which has led to a growing trust industry). The regulatory climate is also benign. Dennis Daugaard, the Republican governor, believes in keeping government out of business’s way. “When it comes to laws,” he says, “more isn’t always better.” Since 2011, when he came to office, he has repealed 3,724 regulations.
While people have been looking at Kansas, South Dakota is the real supply-side miracle. In my view the key is the lack of a state income tax. While Brownback did cut the top rate in Kansas, it was merely to 4.8%, only slightly below the 5.3% rate in Massachusetts. In contrast, the top rate is 0% in South Dakota (and Texas.) Personally, I wouldn’t move to South Dakota if it was negative 10%. (I plan to retire in California.) But the zero rate is probably low enough to draw in a few hardy midwesterners. But a 4.8% rate? Sorry Brownback, that’s not going to produce any miracles, not when you are sandwiched between Texas and South Dakota.
PS. The Economist mentions that the Indian reservations in western South Dakota are very poor, as firms don’t want to invest in a place where they would not be able to have any property rights. I don’t recall seeing that issue discussed in the blogosphere.
PPS. Matt Yglesias and Ryan Avent and Paul Krugman are right; the coastal areas need to build much more housing. People want to live in California despite the horrible state government. That’s why their housing prices are so high. Instead people are forced into places like the Great Plains. And that’s a crying shame. (Did I mention that I plan to retire in CA?)
PPPS. Koch Industries is based in Wichita, Kansas, and uses a Thomas Piketty-like egalitarian management approach:
The system is highly democratic. Koch has an unusually “flat” organisational structure for a company its size. Workers can earn more than their bosses. High-school-educated farm boys from Kansas can rise faster than Ivy League MBAs and end up running multibillion-dollar divisions.
PPPPS. After doing this post I came across an article in the WSJ on the new rankings by the Tax Foundation:
Fast-growing Wyoming [#1 tax climate] has no corporate or individual income tax, but it can’t rest on its laurels. Wyoming is facing new competition from states seeking to modernize their tax systems to compete for jobs and opportunities. Kansas fell three spots to 22nd despite its income-tax cuts because other states didn’t stand still.