Red States Awash in Red Ink: Laffer Curve Is Properly Named

The lasting Reagan mythology, (that tax cuts are the best way to stimulate growth in the U.S. economy) is that Republicans–especially in “Red States”– find themselves awash in red ink and huge budget deficits from following, a “conservative” theory called the Laffer Curve–as has every Republican administration since Herbert Hoover’s Great Depression. And amazingly, they somehow promote themselves as the party of fiscally responsible governance.7_19231

Following a simple equation: low government spending plus tax cuts equals all-but-guaranteed economic growth, lower debt and defits and full government coffers….only it has NEVER, EVER, worked out that way…EVER!

Looking at states governed by Republicans, and looking at the administrations under Republican presidents reveals that this guiding principle is abject hogwash, yet their supporters continue to swallow this snake oil. To put it bluntly, the GOP, and its ignorant blind followers, need a collective refresher course in economics, if not basic math and reading comprehension.

Five years after the economic recession wreaked havoc on their budgets, at least a dozen red states are awash in red ink, facing nine- and ten-figure deficits heading into the new fiscal year. That’s led GOP governors who won office by pledging fiscal “responsibility”, to slash critical spending on everything from education to the crumbling roads, bridges and airports. meanwhile, congressional republicans increase the spending on fighter jets that can’t takeoff without bursting into flames, and increase the financial burdens for the poorest, least able to make a difference in the budgets…to say nothing of using of accounting sleight-of-hand hucksterism to make the books look better than they are (like George W. Bush not including the costs of the two wars he started in any of his budgets).

The rising red tide of enormous red state deficits could wash away the so-called “Laffer Curve,” (phonetically appropriate because a key element of Republicans’ long-held fiscal orthodoxy that asserts tax cuts pay for themselves by stimulating economic growth has been an abject failure; ergo “laffable”).

In Kansas, two-term Republican Gov. Sam Brownback famously declared his state was a real-world “experiment” for the GOP’s fiscal ideas devised by Arthur Laffer, an influential conservative economist and one of Brownback’s key advisers. Despite Laffer’s presence on his policy team, Brownback’s state’s budget is $1 billion in the red. Similar policies in Bobby Jindal’s Louisiana, Scott Walker’s Wisconsin, and Rick Walker’s Florida face disastrous situations that threaten formerly prestigious college universities with bankruptcy. Louisiana State University even faces losing its accreditation for its Business School, Law School, Engineering school and, most importantly, that state’s only teaching medical school.

In New Jersey, Gov. Chris Christie of New Jersey faces a $7.35 billion structural budget deficit, including $2 billion in overdue payments to the state pension fund. In Louisiana, Gov. Bobby Jindal, is scrambling to plug a $1.6 billion budget hole that could wreck the state’s public university system.

But Gov. Scott Walker of Wisconsin – a two-termer who, after star turns at recent GOP 2016 conferences in Washington, Iowa and elsewhere, is consistently ranked among the Republican front-runners – arguably has the most at risk, economically as well as politically. As Laffer himself declared Walker a “perfectly tuned” presidential candidate, the governor found himself staring down the barrel of a $2.2 billion state budget deficit, forced to make tough spending decisions that could undermine his White House ambitions.

Like Jindal, Brownback and Christie, Walker is loathe to hike taxes, so he’s proposed making painful budget cuts to balance the budget, most notably to the University of Wisconsin system, long considered one of the best public colleges in the nation. That decision, however, would mean faculty upheaval and higher tuition and student fees. The news that triggered protests, got national attention and threatens to undermine Walker’s yet-to-be-declared presidential campaign.

Overall, budget deficits in conservative states aren’t a good look for a party whose brand is fiscal discipline. And with the White House on the line, the hard times in red states almost certainly will end up in Democratic issue ads as the 2016 election gets closer.

“It’s classic Laffer Curve,” says Dean Baker, co-director of the Center for Economic Policy Research, describing the economic theory that tax cuts will pay for themselves by stimulating increased economic activity. Laffer purportedly sketched out the idea on a napkin over lunch with Nixon administration aides Donald Rumsfeld and Dick Cheney in 1974.

State budget crises aside, however, Laffer’s theory is so widely held that Walker, Jindal, Christie, former Florida governor Jeb Bush and nearly all of the 2016 presidential aspirants are expected to endorse tax cuts on the campaign trail.

“There’s about a 50-50 chance that the next president will be a Republican” he writes. “Almost certainly a Republican president would be accompanied by a Republican Congress, which will be highly motivated to pass the new GOP president’s agenda. Tax cuts can be enacted by reconciliation, as George W. Bush did in 2001, so they cannot be blocked by a Democratic filibuster.”

Kansas’ five-year experiment with Laffer’s theories has been a disaster by almost any quantifiable measure. The Sunflower State lags behind its peers in:

  1. Job creation
  2. Tax revenue is far short of expectations and its bond and credit ratings have been downgraded because rating agencies say the tax breaks are unsustainable and the promised economic growth never happens.

“I think it’s curious. [GOP leaders] just refuse to look at the evidence,” (sound familiar client-change-denier?) he says, citing the work of former Congressional Budget Office chief Douglas Elmendorf, whom congressional-majority Republicans fired late last year, purportedly for questioning Laffer-curve economics. GOP lawmakers wanted him to score federal spending cuts as stimulating the economy instead of negatively affecting future budgets.

Meg Wiehe, state tax policy director at the nonpartisan Institute on Taxation and Economic Policy, says Kansas’ tax cuts are “definitely the number-one reason the state faces a big budget gap.” And in Wisconsin, she adds, it is that, as the national recession ended and state revenues ticked up, Walker “enacted some permanent tax cuts” instead of paying off debt, investing in education or infrastructure or setting the money aside in a rainy-day fund.

“We saw this in a lot of states: this sort of run to ‘Oh, my God, we have a [revenue] surplus coming in! Let’s blow it all on tax cuts!'” Wiehe says. “There are multiple problems with that,” including budget forecasts built on economic expectations that don’t pay off.

By contrast, Wiehe and others say, Minnesota has generally refuted Laffer’s theory.

Even though Walker and Minnesota Gov. Mark Dayton, a Democrat, took office at the same time, they took their states down different paths. Rather than cut taxes and slash spending to balance out-of-whack budgets, Dayton and the state legislature hiked taxes, modestly, on upper-income earners, closed corporate tax loopholes and made badly-needed investments in education and infrastructure.

The moves are paying off: in addition to having a budget surplus, Minnesota so far has outperformed Wisconsin on job creation, has a lower unemployment rate and is ranked higher on national lists of best places to live.

All of which should make for a cautionary tale for voters who may have to choose between Walker, Christie or even Jindal when the 2016 race begins in earnest. And, as Skinner writes, voters ignore their state’s fiscal records – and the records of other Republican governors who have followed the same philosophy – at their peril.

Harvey A. Gold