What’s the Matter With Kansas – and Connecticut?

In 2012, the state of Kansas under Gov. Sam Brownback passed a large tax cut. Despite this massive fiscal stimulus, the state’s economy actually underperformed the nation during much of the subsequent period and the cuts blew a gigantic $900 million hole in the state’s budget.

Finally the legislature cried uncle. It passed a $1.2 billion tax hike. Brownback vetoed it but the Republican dominated legislature overrode the veto.

Not only did the tax cuts fail to grow the economy, one of the state’s major metro regions, Kansas City, received a gigantic free broadband investment in the form of Google Fiber. Spanning Kansas and Missouri, this investment also failed to produce significant tech growth.

Meanwhile in Connecticut, the state twice raised taxes to address a budget deficit. Unfortunately, these tax hikes did not create long term revenue growth. What’s more, after the most recent rounds of tax hikes, the state experienced a corporate exodus highlighted by GE and Aetna. The state capital of Hartford is also flirting with bankruptcy. Gov. Dannel Malley now admits the state is tapped out on tax increases.

There are a lot of claims one can make out of these situations. I’m only going to point out that both Kansas and Connecticut are out of favor in the marketplace right now. For example, while the suburban office park may not be extinct, it’s certainly facing challenges in high tax settings like New Jersey and Connecticut. Companies like GE are in fact increasingly looking to global city centers for their highest level executives. Connecticut doesn’t have that product on offer and can’t create it. Regarding Kansas, it was likely a low tax state even before the cuts, which did not materially improve its competitive position or instrinsic attractiveness.

It’s simply very difficult to counter these macro forces. When cities were out of favor, even NYC was en route to oblivion. Trying to push on a string often only creates as many problems as solutions.

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Kansas and Connecticut Lessons Learned

Kansas and Connecticut made two different versions of the same mistake: They made a decision about their long-term finances based on their political convictions rather than based on economic research.

Back in 1990, Connecticut was able to draw businesses and individuals from New York and Boston because Connecticut offered (comparatively) lower costs of living. In 1991, when they instituted an income tax of 4.5%, the comparison got a lot less distinct. By 2015, the rate had grown to 6.99%, and still didn’t cover all the services Connecticut wanted to offer. (The tax base had not moved to New York or Texas, so much as to retirement homes in Florida, and of course, industrial parks in China.)

This was a predictable outcome.

Studies have shown the corporate and individual taxpayers seek (mostly) the same things: Good schools, good roads, a handful of nice parks, and a competitive cost of living. If you take away any one of those things, your population will start to decline. If you improve just one, it will change almost nothing. If you improve one at the cost of the others, it could force your economy into a permanent recession.

Kansas decided to lower their cost of living, but not to address any of the other factors that made anyone want to live in Kansas. At the start of the experiment, literally hundreds of economists warned them it would fail. Brownback and his friends dismissed the economists as “democrats” and proceeded down the path anyway, ignoring common sense and empirical research alike.

Lowell Weicker made an analogous mistake in 1991. In 2009 former Connecticut (Republican) Governor Jodi Rell raised the top rate on individuals earning $500,000 or more to 6.5%, which (Democratic) Gov. Dannel Malloy has lifted to 6.99%. As businesses and individuals fled, the government has resorted to offering them bribes to stay.

If residents of Connecticut had anything at all to show for their higher taxes, it would soften the blow, but they don’t. The higher taxes came at a time when people were already moving out, and as a result, even more people moved out. Total tax revenues declined.

Conservatives claim that Connecticut can return to prosperity simply by cutting their taxes back to 1990-levels. Fortunately or unfortunately, we have Kansas as a stark example of how well that works.

Instead, the Nutmeg State is going to have to cut spending, and particularly pensions. Let’s face it. The hole in their budget is from services, pensions and retiree health benefits, and the hole is getting bigger every year. The only way to honor the commitments they already made is to stop making new commitments. Once they control spending growth, and prove they can bring their financial house in order, you will be surprised how many businesses decide to stay.

In Kansas they have a saying for that kind of hard lesson: “The same cow kicked you.”