Conservative orthodoxy says that states prosper most through a libertarian-inflected approach to governance: small government, fiscal austerity, low taxes, and light regulation. It’s an amazingly simple formula—if it works. Indeed, it’s very possible to point to booming red states that follow this model as validation of it. Texas, Florida, and Tennessee—none of which has an income tax—have become growth juggernauts.
But a broader perspective shows the limits of this theory. If you measure prosperity qualitatively rather than quantitatively—by looking at per-capita GDP or per-capita income, rather than just growth in population or jobs—higher-tax states and locales on the coasts look much better. For all California’s problems, extremely high-value industries like technology and entertainment remain strong in the Golden State. Elite higher education and biotechnology are clustered in Massachusetts. The highest peaks of the US economy remain in high-tax locales.
The most important corrective, however, is to look at the states where the conservative playbook didn’t work as advertised, such as Kansas and Indiana. In 2012, under Gov. Sam Brownback, Kansas passed a big tax cut, reducing the top rate to 4.9 percent, down from 6.45 percent, and eliminating taxes completely on “pass-through” businesses (where the income from the business is treated as personal income to the owners, rather than as a separate corporate entity). Not only did this not spark economic growth, Kansas underperformed the nation and its own previous track record. What the Browback tax cut did do was cause a fiscal crisis. Large budget shortfalls necessitated cuts in services and triggered a reduction in the state’s bond rating. Eventually, in 2017, the state legislature reversed most of the cuts. The “Kansas experiment” was a failure.
In Indiana, the GOP has controlled the governorship for more than 16 years, and both houses of the state legislature for more than a decade, making it a “trifecta” state for Republicans. The state has repeatedly slashed taxes, especially for manufacturing businesses. It has piled up multibillion-dollar surpluses and has a AAA credit rating. It passed an anti-union right-to-work law, eased environmental regulation, and overrode attempts by localities to regulate industries like apartment rentals. The Tax Foundation ranks it the ninth best state for business-tax climate, and Chief Executive magazine ranks it the fifth best state.
“Indiana’s comprehensive conservative governance has been a failure for the citizens of the state.”
Yet Indiana’s comprehensive conservative governance has been a failure for Hoosiers. Yes, Indiana has grown its population and increased jobs slightly faster than some neighboring Rust Belt states, but that’s an extremely low hurdle to clear. The state significantly trails the nation as a whole. And although it is the most manufacturing-intensive state in the country, and with a tax and regulatory structure supposedly geared to support it, Indiana has lost out on a slew of multibillion-dollar advanced-manufacturing megadeals in recent months: a $20 billion Intel chip plant to Ohio, $7 billion in electric vehicles by GM to Michigan, a $10-billion-plus Ford battery factor to Tennessee, a $1.3 billion Toyota battery plant to North Carolina, and a $2 billion electric-vehicle-battery plant to Kentucky.
Indiana has also grown poorer, with incomes falling relative to the nation from an already-low starting point. It ranks a dismal 46th in the country in wage growth, with only 42 percent of workers in the state making a living wage and receiving employer-provided health insurance, even after adjusting for the state’s low cost of living, according to the Brookings Institution. It is a bottom-10 state for educational attainment and, according to economist Michael Hicks, suffered its worst erosion ever versus the nation for its share of the population with college degrees during the 2010s. While most of the country has been adding jobs among the college-educated, Indiana’s job growth has been among those with less than a high school diploma.
The state Republican Party’s response to all this? Another tax cut, passed earlier this year. Former Gov. Mitch Daniels defended the cut in The Washington Post opinion pages with a classic conservative argument: It’s the taxpayers’ money. He is, of course, completely correct, and governments should avoid holding on to more of their citizens’ money than necessary. Yet around the same time, the Indianapolis Business Journal warned that the state’s special-education system was on the verge of collapse, due to a severe shortage of teachers. That’s just one example of how Indiana’s low-tax environment has been purchased at the expense of quality of life and basic services, all while failing to deliver economic prosperity.
This isn’t to say that Indiana or Kansas would necessarily boom if they hiked tax rates and spent more money. There are plenty of high-tax blue states like Rhode Island—with “the costs of Minnesota and the quality of Mississippi,” as one observer quipped—that are also underperforming. The takeaway is that economic growth depends on many factors. Conservatives are over-reliant on simplistic models of the world—from the idea that lower taxes spur economic growth to the Laffer curve—that contain elements of the truth but are far from an accurate and complete assessment of how the world works.
The unpleasant reality is that an entire 23-state region I call “the Old North (the Northeast, Midwest, and Great Plains), has underperformed, with population and economies showing relative (or even absolute) decline versus the nation as a whole. Only North Dakota, with its likely temporary oil boom, has been an exception. Population growth seems to be closely linked to factors like warm January temperatures that cold-weather states can’t do anything about.
Conservatives nationally, and especially in the many red-to-purple states that are stagnant or underperforming, need to develop a much more sophisticated understanding of prosperity, and a better playbook for achieving it. In some areas, there might not be anything that can create boomtown growth. Still, there are surely many things they could be doing for their people. That will require a focus on actually governing and using the state to improve the lives of its citizens, not just cutting things. Make no mistake, that’s really hard. But take the easy way out with cookbook formulas like “tax cuts good,” and eventually the marketplace may render a judgment that can’t be evaded.
Ask the people of Kansas and Indiana if you don’t believe me.