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Monday, July 11, 2011

Kansas says ALEC is WRONG

Bernie Koch: Tax cuts aren't magic formula for growth


By Bernie Koch

Two studies recently ranked the states on their economic performance and outlook, reaching vastly different conclusions about Kansas.

The American Legislative Exchange Council's "Rich States, Poor States" study ranked Kansas 27th among the states in overall economic outlook. The study concluded that low taxes and low regulatory burdens are the keys to a strong state economy and that state income taxes should be eliminated.

The "Rich States, Poor States" study is useful, but it's a narrow approach to the evaluation of economic competition. Respected empirical studies indicate other factors to be as important, if not more so. These include infrastructure and equipment, labor efficiency, education and innovation.

Business news channel CNBC measured many of these factors in its recent study, "Top States for Business," which ranked Kansas No. 11. Kansas does particularly well against states that do not have an income tax.

The only state without an income tax that ranked ahead of Kansas was Texas. It was No. 2 behind Virginia. Texas also ranked second in the "Rich States, Poor States" study in economic performance, but for different reasons. Many in Kansas have urged our legislators to imitate the Texas tax system — meaning eliminate income taxes.
In the CNBC study, Texas received high rankings in infrastructure and transportation, technology and innovation, access to capital, and cost of living.

Consider transportation. Texas has more public road and street mileage, more highways, more bridges, more railroad mileage, and more airports than any other state (more than 10 percent of all airports in the country). It also has 16 ports on the Gulf of Mexico. The "Rich States, Poor States" study paid no attention to these advantages.

Interestingly, the CNBC study ranked Texas 33rd in the cost of doing business. Kansas actually beat Texas in this category, ranking 27th, even though Texas has no individual income tax.

This is not surprising. The Texas Taxpayers and Research Association says that 61 percent of Texas' state and local taxes are paid by business, and "Texas' reliance on sales and property taxes heavily ties our tax system to the production and sale of 'goods,' placing a high tax burden on capital-intensive businesses."

The association concludes that the service sector in Texas has a relatively light tax burden, while economic sectors such as agriculture, manufacturing and retail are paying a disproportional load. Yes, Texas is growing more jobs than any other state, mainly in the service sector.

Other structural problems of Texas' tax and budget system have been coming to the forefront recently.

Standard & Poor's, the credit-rating agency, issued a report this year blaming Texas' budget problems more on its tax and budget structure and less on the weakness of the economy. It concluded that the problems were likely to reappear and persist.

We shouldn't imitate Texas, and we should be skeptical of the conclusions of "Rich States, Poor States." There can be a positive impact on the economy by strategically lowering taxes, but it's not a magic formula for economic growth.

Bernie Koch of Wichita is executive director of the Kansas Economic Progress Council, based in Topeka.

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