Are we in a huge budget hole created by the tax cuts championed by Gov. Sam Brownback, or will economic growth save the day?
The state’s own consensus revenue estimates are glum, forecasting a deficit that grows in the coming years. If the governor’s proposal to fill the hole with temporarily reduced pension fund contributions and by “sweeping” highway trust fund balances is adopted, state economists estimate about a $650 million revenue shortfall in fiscal year 2016.
If steps were implemented across the board, closing this gap could mean more than 10 percent in cuts to every state agency and program. If the courts mandate higher school aid, the gap grows. Nor does it factor in rising costs: A 10 percent cut in spending translates into a far greater cut in services, because of the failure to cover rising costs such as employees’ health care.
But the budget outlook is rosier if “dynamic scoring” is used. Essentially, dynamic scoring is a different way of calculating budget estimates whenever tax cuts are involved. It is based on the Laffer curve, designed (allegedly on a dinner napkin) by economist Arthur Laffer in the 1970s. The Laffer curve predicts that if taxes get too high, cutting those high taxes will actually increase government revenue. This is because they will spur on so much new economic activity that the economic base will grow. Tax rates are lower, but economic growth fills the gap. The Brownback administration hired Laffer as a consultant for its budget blueprint.
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Congressional Republicans also like dynamic scoring. Last year the U.S. Senate joined the House in requiring that the Congressional Budget Office release alternative dynamic scores of tax bills. Even a few Democrats voted for it. Dynamic scoring is the ultimate budgetary win-win: a chance to match conservatives’ beloved tax cuts with liberals’ concern for funding critical government services like education, infrastructure and social services.
Unfortunately, economists cannot agree about which tax rate raises the most – the one at which, if taxes go any higher, the resulting economic slowdown actually reduces collections. Also, in order to work, dynamic scoring needs to calculate the cost of cutting government services. After all, growth may also come from paying teachers, building and repairing infrastructure, and providing health care.
In fact, the evidence that marginal changes in tax rates drive growth is rather questionable. Many argue that businesses make decisions based on the market, not tax rates.
Finally, budget estimators have been using dynamic scoring for years, usually producing reasonably accurate estimates. However, legislators want them to be larger. Mandating more aggressive dynamic scoring means trying to fix a math problem with legislation, much like the urban legend about legislators who, years ago, tried to make pi equal 3.0
It is wise to remember the folk saying that “if something seems too good to be true, it probably is.”
Michael A. Smith is an associate professor of political science at Emporia State University.