“Look out Texas, here comes Kansas!” said Kansas Gov. Sam Brownback in his recent state of the state address on Jan. 15.
The governor was unflappable and upbeat in the face of a Jan. 11 district court reversal of his budget cuts in education that financed a recent, sizable cut in the state’s income tax rate that went into effect on Jan. 1. Now, despite a Kansas budget that is about $267 million in the hole due to the income tax cuts, and being placed on Moody’s outlook for possible negative rating action, the GOP governor remains committed to cutting the state’s income tax rate again — to zero, if possible.
I am familiar with, and like, Kansas. I grew up next door in Missouri. My brother lived in Topeka and Manhattan, Kan., for a while. However, if you take Gov. Brownback at face value and think that Kansas is going to be able to take business away from Texas because of its new state tax structure, you may want to think it over.
The governor’s tax-cutting enthusiasm is not likely to be matched by an equivalent amount of success. Texas has such enormous advantages over many states, including Kansas, in terms of competing for economic development and in generating economic growth that the idea that a cut in income tax rates would place Kansas on a level playing field with Texas is quaint.
Texas has four rapidly growing large urban centers, each with its own unique character. Houston, Dallas, Austin and San Antonio each contribute sizably, and in different ways, to growth in Texas. Kansas has no cities over 1 million in population. Its largest, Wichita, with 382,000, has the same population as Arlington, Texas’ seventh largest. This is not just an issue for those who prefer urban living. There are many economic activities that are accomplished most efficiently in urban centers where agglomeration economies reduce costs through higher density, more rapid knowledge transfer, easier cross-training, and a ready supply of very highly specialized labor.
Texas has a lot more than an urban profile. It is the second largest state in the nation by area. It is economically formidable as a huge agricultural, ranching and mining state. With 268,820 square miles versus 82,277 for Kansas, Texas has 3.3 times the area. Texas has more natural resources — specifically, oil. Texas is on the Gulf of Mexico, which means it has ports for international trade, beaches for recreation and a commercial fishing industry. Texas has an international border with a major U.S. trading partner.
The Lone Star State has eight professional major league sports franchises (football, basketball, baseball and hockey) while Kansas has none, unless you give partial credit for the two teams from Kansas City, Mo. Over one-half million people moved to Texas in 2010, more than one-sixth of the permanent population of Kansas.
Kansas, along with many other states, cannot compete with Texas in some important economic dimensions. These competitive disadvantages have nothing to do with tax policy, however, and everything to do with location, natural resource endowment, current economic scale and scope, and a host of other factors that either cannot be changed at all (the difference in the wealth of natural resources) or not for a very, very long time (large urban centers).
While no one can fault Brownback for his enthusiasm for competition, my concern is that many states are becoming laboratories for experimental fiscal policies. The economic benefits of a lower income tax rate are narrower and more limited as a basis for competing with surrounding states, or in terms of promoting organic economic growth, than is being assumed. That is why despite the huge disadvantages in costs and taxation, pharmaceutical companies are not moving from California to Kansas even though Kansas does have a small biotech industry.
It is tempting for politicians to think that making a change in tax policy will dramatically alter the course of a state’s economy, as if by the wave of a magic wand. However, the natural endowment and present economic circumstances of a state will disproportionately affect its growth pattern.
Does state fiscal policy matter? Of course, it does — just not enough to exclude all other considerations. It would be a shame if the other states considering radical fiscal surgery (Louisiana, Nebraska, North Carolina and Oklahoma) were to follow Kansas down the road of fiscal experimentation with all of the risks of destabilizing their state finances in the short term and with little or no promise of any real success in the long term. States, modernize your tax and revenue structures, but no radical surgeries, please.
Chris Mier is the chief strategist and director of the Loop Capital Markets analytical services division.