It may be time to reevaluate what we mean by "a healthy business climate."
Some 35 years ago, economist Arthur Laffer developed the theory that cutting taxes would put more money in the hands of wealthy people who would then invest it and create jobs. The theory was that expanded economic activity would bring in more revenue than the original amount of the tax cut. The theory became known as supply side, or trickle down, economics.
Kansas is the latest evidence that low taxes will not lead to business expansion. Five years ago, Kansas Gov. Sam Brownback became the darling of small government, low-tax, right-wing enthusiasts when he announced that he would significantly cut taxes to stimulate economic growth in Kansas. In 2012, Brownback proclaimed massive tax cuts "would be like a shot of adrenaline into the heart of the Kansas economy."
The problem is, it didn't work. In the past five years Kansas has seen its credit rating downgraded by two rating agencies, a deficit of more than $400 million and inadequate funding for roads and schools. The promised economic growth didn't show up. Growth in gross state product, personal income, employment and private industry wages all trailed the region and the country.
Last month, Democrats and newly-elected moderate Republicans in the Kansas Legislature passed a package of tax increases and then overrode Brownback's veto. Kansas recognized that a low-tax, low-service government was not conducive to business health.
As we rethink what we really mean by "healthy business climate," we need to clear away myths about cutting taxes. To those who have a religious faith in low taxes, Ronald Reagan is considered almost a saint. But the truth is that after the big tax cut in his first year as president, Reagan signed smaller tax increases every year from 1982 to 1988 when he thought they were needed.
Reagan's staff put together a list of tax cuts and increases during his presidency. He cut $275 billion and raised $133 billion. So he did cut taxes, net, but the point is that Reagan was willing to walk away from partisan ideology when the nation needed revenue.
North Dakota's Legislature and Chamber of Commerce have some of the same attitudes as Kansas. They have the misplaced faith that low taxes create a business-friendly climate.
Starting in 2011, North Dakota cut its individual and corporate tax rates, already among the lowest in the 50 states, in half. The irony of this is that prior to the cutting, there had been a 2008 initiated measure on the ballot to cut individual and corporate taxes. When given the option to cut their own income taxes, 70 percent voted no.
North Dakota is not in as bad shape as Kansas. But it is only two to four years behind. The state's funding of K-12 education is falling behind inflation; the Grand Forks School District had to cut $1.2 million from next year's budget, and inadequate resources foment the state drove employee salary negotiations to impasse. The state's funding for roads, bridges and airports is $100-$300 million short of what's needed. We used to fund road construction and maintenance from the gas tax, but for several sessions it hasn't been enough. We are afraid to raise gas taxes, so we are now using general fund money to fill the gap. But, because we cut income tax revenues, there is no adequate source to pay for roads.
It's time the Chamber stepped up and called for an increase in the gas tax (which hasn't been raised in 12 years).
For many years, the Chamber has been saying, quite rightly, that higher education is one of the main drivers of economic dynamism in North Dakota. At the same time, they've been championing a low tax climate. But, as this past legislative session proved, you can't have it both ways. The 2017-19 budget was about $1.3 billion short of balancing. The amount of tax revenue forgone over eight years of tax cuts was-tah dah-$1.3 billion.
A 20 percent cut in higher education funding cannot be good for the business climate. The inescapable fact is that cutting taxes, over time, cuts the very services businesses depend on.
Too often when politicians want to court voters they claim to be speaking for "the taxpayer" when they want to claim credit for cutting taxes. In reality, most taxpayers would be willing to pay slightly more in taxes if it meant they would have better roads and airports. And most business leaders would be willing to pay slightly more in income and corporate taxes if it meant stronger universities and colleges they could partner with. And almost every taxpayer would pay somewhat more to have their children go to strong public schools.
The point today is to show that low taxes do not equate to a "healthy business climate." Two weeks from today, I'll try to identify the positive elements that help businesses thrive.
Eliot Glassheim is a former state lawmaker from Grand Forks. His columns appear regularly in the Herald.