Economist Arthur Laffer: Tax, unions hurt Kansas' prosperity

01/19/2012 5:00 AM

08/08/2014 10:08 AM

Economist Arthur Laffer urged Kansas lawmakers to stay the course on cutting income taxes and battling unions to bring the state to greater prosperity.

“If you tax people who work and you pay people who don’t work — do I need to say the next sentence to you? Don’t be surprised if you find a lot of people not working,” said Laffer, who consulted with Gov. Sam Brownback and Revenue Secretary Nick Jordan on the administration’s plan to cut taxes.

Laffer, who has a $75,000 contract to consult with the state on tax reform, appeared before both the House and Senate tax committees.

He told legislators that the nine states without a state individual income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — significantly outperform higher-tax states.

“The performance difference is huge,” he said. “You can’t tax a state into prosperity. You really can’t.”

Laffer also said that his research has shown that states with right-to-work laws fared better economically among the no-income-tax states than states that allow for closed union shops.

Kansas is already a right-to-work state, meaning that no worker can be compelled to join a union as a condition of employment.

And Brownback’s plan would start to move Kansas in the direction of being a no-income-tax state as well.

The plan would abolish state income tax on limited liability companies, sole proprietor businesses, partnerships, personal income from farming and subchapter S corporations. That exception would be available to about 190,000 taxpayers and encompasses most small businesses and many large ones.

Most wage-earners would pay income tax at 3 percent on their first $15,000 of income and 4.9 percent on anything over that. The plan gets rid of the state’s earned income tax credit, which rebates taxes to low-income single parents, shifting money to social programs directed at the poor. It also holds the state’s sales tax — which was scheduled to drop next year — steady at 6.3 percent.

Republican members of the Senate Assessment and Taxation Committee appeared awed by Laffer, best known as the architect of President Reagan’s supply-side economic policies.

“What an honor and privilege to have you here in Kansas,” said Sen. Julia Lynn, R-Olathe.

But Sen. Tom Holland, a Democrat who ran against Brownback in the 2010 election, questioned Laffer’s assertions that income-tax policies are what make prosperous states prosperous.

For example, he pointed out, Texas and Alaska have vast energy resources. Florida and Nevada, tourism.

“I think it’s a false analogy,” Holland said. “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.”

Sen. Les Donovan, R-Wichita, admonished Holland for his aggressive questioning of Laffer, who he said was “a special guest who has proven expertise in the field of economics going back decades. So we’re going to try to plumb his source of knowledge and everything the best we can.”

“I don’t want any more of those” kinds of questions, Donovan said. “We’ve had this discussion but that’s the last one I’m going to allow.”

Responding to Holland, Laffer acknowledged that some other states do have advantages.

“You’re right, Florida is not Kansas,” he said. “But don’t tell me you can’t learn anything from Florida.”

He also said there’s internal data from states such as Ohio and West Virginia showing the effects of tax increases and cuts.

Despite Donovan’s admonition, the tough questioning of Laffer continued when Donovan opened the discussion to the audience.

Kari Ann Rinker, a single mother who represents the National Organization for Women at the Capitol, objected to the portion of Brownback’s tax plan repealing the earned income credit.

“How will eliminating an earned income tax credit for a single mom that earns $20,000 or less a year encourage her to work and become prosperous?” she said.

Laffer replied, “I was for a number of years a single father raising four children and I know the circumstances. It’s devastating. I’m gonna go back to the Kennedy quote here if I may, when Jack Kennedy said that the best form of welfare is still a good high-paying job. And you just can’t create prosperity through handouts or programs like that.”

He said overall economic growth would help the kind of woman Rinker described.

“My guess, and this is me coming as a macroeconomist, is that if we can create jobs here in Kansas, that that will redound to the favor of a single mom raising kids,” Laffer said.

He also said he thinks it will be more efficient to use the money the state will save by eliminating the earned income credit to provide direct health and social service benefits to the poor, as Brownback proposes.

Rinker wasn’t satisfied, however.

“Our governor accused women, of people using these credits as a measure of fraud. He used the word fraud. People are fraudulently taking this credit,” she said.

“You’ve got to talk to the governor about his phrases,” Laffer responded. “That’s not a phrase I would ever use. But I would tell you that I really, honestly believe that these programs that the governor is proposing are far more likely to bring in jobs than anything else.”

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