- More in our closer look segment tonight.
Wisconsin Governor Scott Walker is proud of the amount of taxes
he has cut in his six years in office,
but he hasn't cut taxes more than all other governors during
that time.
That would be Kansas Governor Sam Brownback who said his state
would prove big tax cuts lead to economic growth.
It didn't.
After six years of state deficits leading to budget cuts,
last month Republicans in the Kansas legislature voted to
raise taxes and then voted to override the governor's veto.
A recent study says the tax cuts in Kansas and Wisconsin did not
spur growth and may have harmed economic performance.
We're joined now by one of the authors of the study,
Dan Rickman a professor of economics at Oklahoma State
University.
Thanks for your time today.
- Thank you. Glad to be here.
- Wisconsin and Kansas were just two
of a handful of states were new Republican governors
decided to lower income tax rates.
Kansas is the most studied.
But why did you include Wisconsin in your analysis?
- Well, Wisconsin was fairly notable as well because he came
in not only with the tax cuts but as you know,
he enacted a number of other changes in governance.
So it was high visibility.
To be quite honest, Wisconsin is my home state.
So I wanted to have more than one state.
I wanted to take two states that were very notable for their
experiments and see how they fared.
- Your paper found the overall conclusion is "the fiscal
experiments did not spur growth and if anything harmed state
economic performance." How did you reach that conclusion?
- Well, what we did was create a counter-factual experiment.
So when they enact these policies,
we only have one observation, is what they do,
and we can observe that in real time.
But what we can ask is what would have happened had they not
enacted those policies?
So what we do is we create a comparison that we call a
counter-factual comparison.
What would have happened had they not done that?
And to do that, we use states that are similar in economic
structure.
We created an index that mimics Wisconsin's behavior up until
2011 and then see how Wisconsin compares to the index post-2011.
- Wisconsin did not under-perform as much as Kansas
did.
Is that because Wisconsin didn't cut taxes as much?
Is it that simple?
- Mostly that's it.
They did not enact as great of tax cuts as Kansas did.
- Now, state spending and higher taxes are important.
Why don't states with the highest taxes have the best
economies?
Is there a balance they should be looking for?
- Well, there is a balance.
You have to balance the negative aspects that you can get from
higher taxes.
Higher taxes can discourage savings,
can discourage business formation.
But, on the other hand, state spending on education and
highways are important components of growth.
So you really have to balance the two.
So what you try to avoid is erring too much on either side.
- First you wanted to compare Wisconsin and Kansas to neighbor
states Minnesota and Nebraska.
In your study you say that didn't work.
Why is that?
- Well, to create these experiments what you want is a
comparison that behaves the way the state does prior to the
governor taking office.
Minnesota out-performed Wisconsin prior to 2011.
So they may not be a fair comparison.
We also looked at Nebraska compared to Kansas and Nebraska
out-performed Kansas prior to 2011 as well.
So what you want to do are create this index to compare two
economies that behave and perform similarly to Kansas and
Wisconsin prior to 2011 and are more similar in economic
characteristics.
Our index is based on states that are more similar to Kansas
and Wisconsin than Minnesota is to Wisconsin or Nebraska is to
Kansas.
- Now, you ultimately used something called the synthetic
control method, which I assuming is the index you're referring
to, and that weighted comparison of other states.
For people that want to believe that tax cuts do promote growth,
how do you convince them that synthetic control isn't just a
made-up formula that will produce the results you're
looking for?
- Well, you have no control over which states it creates.
The only thing you can control are the states it considers.
So we allowed it to consider all states for comparison other than
energy states for the obvious reason the energy sector was
behaving very differently during that period.
So there isn't anything prior to 2011 that we're imposing.
That's totally up to what we use in terms of the statistical
analysis to select the states.
And the weights that they give each of the states in correcting
the index.
- Now, Wisconsin people love to compare themselves to Minnesota,
including in government and the legislature.
But the synthetic control found the best comparisons were Iowa
and Indiana, not Minnesota.
So is that based on how the economies perform,
what the economies are made up of?
- Both.
So Minnesota has a more educated labor force,
particularly they have more college-educated individuals
than Wisconsin does.
There is less manufacturing than Wisconsin.
They're a little bit more urban.
So the synthetic control created this average of states in the
index that are more similar to Wisconsin in those respects.
And the same for Kansas.
It selected states that were more similar as an average than
Kansas -- I mean than Nebraska for Kansas.
- And Governor Walker has recently been promoting
Wisconsin's low unemployment rate.
Is that unaffected by fiscal austerity or would it be
different if Wisconsin hadn't cut taxes?
Can you compare them?
- You can.
Actually, unemployment rate is higher and poverty rate is
higher, labor force participation is lower according
to our analysis than it would have been had you not cut taxes.
- So your argument is that Wisconsin would be doing even
better with even lower unemployment.
- Yes.
I mean, we estimate unemployment would be lower.
Labor force participation would be higher.
Poverty rate would be lower.
You would have created about 30% more jobs from 2011 to 2015
period had they not cut taxes.
- And is that just income taxes or can all other taxes be
included in that argument?
- All of it's included.
So everything that they enacted is considered in this analysis.
- What about at the national level?
Obviously Republicans in Congress would love to cut taxes
similar to what Governor Walker, Governor Brownback did.
Can you make a different argument for state versus state
versus a national picture?
- Yes.
It's somewhat different at the national level.
At the state level we expect stronger supply responses
because it would be easier to move across borders of states
than the nation.
But on the other hand, at the state level you can't print the
money as we call it, run the deficits.
So the national level doesn't necessarily have to cut the
spending in response to the tax cuts.
So they may not get the negative short-term effects that
Wisconsin got because Wisconsin and Kansas both had to cut their
spending.
- What kind of pushback are you getting from people
about this study?
Because obviously there are some people in the political spectrum
that say, "Yes, I believed this all along." And a lot of others
who say, "This is not at all what we believe." There must be
something wrong with the study.
- Well, the pushback hasn't come back against us.
In the policy circles, it's really argued from an
ideological perspective, so we really haven't had pushback in
the study itself.
- And do you have more studies like this in mind?
Are you looking at other states?
Will you continue to monitor Wisconsin and Kansas?
- We'll continue to monitor Wisconsin and Kansas.
We're doing some similar work for Oklahoma,
but it's somewhat different because we're trying to examine
energy states now.
- All right.
Thank you very much for your time, Dan Rickman,
from Oklahoma State.
- My pleasure. Thank you.