Wisconsin Tax Cuts Did More Harm Than Good, Study Finds

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Premiere Date: 
July 14, 2017

Wisconsin Tax Cuts Did More Harm Than Good, Study Finds

A new study coauthored by Oklahoma State University Economics Prof. Dan Rickman found recent tax cuts actually hurt Wisconsin. The study, which compared Kansas to Wisconsin, found that 30 percent more jobs could have been created from 2011 to 2015 if it were not for tax cuts. The study also found that the unemployment and poverty rate would have been lower, and labor participation would be higher.

Episode Transcript

Zac Schultz:

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.

Dan Rickman:

Thank you. Glad to be here.

Zac Schultz:

Wisconsin and Kansas were just two states 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?

Dan Rickman:

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.

Zac Schultz:

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?

Dan Rickman:

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.

Zac Schultz:

Wisconsin did not under-perform as much as Kansas did. Is that because Wisconsin didn't cut taxes as much? Is it that simple?

Dan Rickman:

Mostly that's it. They did not enact as great of tax cuts as Kansas did.

Zac Schultz:

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?

Dan Rickman:

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.

Zac Schultz:

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?

Dan Rickman:

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.

Zac Schultz:

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?

Dan Rickman:

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.

Zac Schultz:

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?

Dan Rickman:

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.

Zac Schultz:

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?

Dan Rickman:

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.

Zac Schultz:

So your argument is that Wisconsin would be doing even better with even lower unemployment?

Dan Rickman:

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.

Zac Schultz:

And is that just income taxes or can all other taxes be included in that argument?

Dan Rickman:

All of it's included. So everything that they enacted is considered in this analysis.

Zac Schultz:

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?

Dan Rickman:

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.

Zac Schultz:

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.

Dan Rickman:

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.

Zac Schultz:

And do you have more studies like this in mind? Are you looking at other states? Will you continue to monitor Wisconsin and Kansas?

Dan Rickman:

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.

Zac Schultz:

All right. Thank you very much for your time, Dan Rickman, from Oklahoma State.

Dan Rickman:

My pleasure. Thank you.

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