Can the Threat of Defunding Education Slow Down Tax Cuts?

A tax fight in Missouri may signify the limits to cuts.
by | September 26, 2013
 

The anti-tax bandwagon has been pretty crowded these past few years, particularly when it comes to taxing corporations. Kansas, for one, slashed its tax rates for corporations last year. Arizona's corporate income tax is set to fall by 30 percent by 2017. And Idaho partially repealed its business personal property tax.

One of the driving forces behind these tax-cutting policies is jobs: States see a business-friendly environment -- full of tax cuts, credits and incentives -- as a way of luring businesses to their states or as a way of keeping their states attractive to existing companies. But a recent tax bill veto fight in Missouri raises a question about legislators' appetite for tax cuts when it means defunding essential services like education or public safety.

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The Republican-dominated legislature there passed a bill to cut the corporate tax rate nearly in half (and lower the state's top personal income tax rate as well). In June, Gov. Jay Nixon, a Democrat, vetoed the bill on the grounds that the loss in revenue -- around $700 million -- would seriously defund education, making Missouri a less attractive state for business relocation. Many legislators disagreed and set a September date to override the veto.

Things got more interesting from there. Texas Gov. Rick Perry got involved, exhorting the legislature to go full speed ahead on tax cuts and override the governor's veto. It was an unusual intrusion into another state's legislative process, but that was not the only message Perry brought to the Show Me State. He also set out to lure Missouri businesses to Texas, which he hailed as a low-tax, business-friendly state. Perry's rationale: Interstate competition for business leads states to institute more business-friendly, economy-growing policies. He doesn't mind, he said, when Louisiana officials come to his state to woo Texas businesses. It makes both states sharpen their competitive game.

It was, perhaps, with an eye on neighbor Kansas and its tax-cutting ways that drove Missouri's legislators to see tax cuts as a means to keep the state's economy in gear. However, when the vote to override took place in September, Nixon's education argument prevailed and the legislature failed. (Republican legislators promise to bring up the issue again next session, but for now the tax cut is dead.) Does this mean corporate tax cutting in the states has hit its limit and that education funding is the blunt instrument that has turned it back?

Nixon's education funding argument has some big numbers to back it up. A report from the Center on Budget Policies and Priorities -- issued a day after the legislature failed to overturn the veto -- detailed the state of public education funding. The report's authors found that in the past six years, states have been defunding education in unprecedented amounts. That defunding has, in turn, led to huge job losses -- losses that run counter to state moves to attract new jobs via tax cuts. More specifically, the report, based on state budget documents, found that:

  • At least 34 states are providing less funding per student for the 2013-14 school year than they did before the recession hit. Thirteen of these states have cut per-student funding by more than 10 percent.
  • Even though most states are experiencing modest increases in tax revenues, at least 15 are providing less funding per student to local school districts in the new school year than they provided a year ago.
  • Where funding has increased, it has generally not increased enough to make up for cuts in past years.

Since local school districts are rarely able to replace lost state aid on their own -- 44 percent of overall education spending is from the states -- it's not surprising there are ramifications from these tax cuts. According to the report's authors Michael Leachman and Chris Mai, "The spending cuts have caused school districts to lay off teachers and other employees, reduce pay for the education workers who remain, and cancel contracts with suppliers and other businesses. These steps remove consumer demand from the economy, which in turn discourages businesses from making new investments and hiring."

Local school districts have eliminated 324,000 jobs nationally since July 2008, according Bureau of Labor Statistics data. "This decline has been unprecedented," Leachman and Mai write. "Normally, local education employment grows each year to keep pace with an expanding student population.

"In the long term, the savings from today's cuts may cost states much more in diminished economic growth," according to the report, which echoes the argument Gov. Nixon made in his effort to preserve his veto. "To prosper, businesses require a well-educated workforce. The deep education spending cuts states have enacted will weaken that future workforce by diminishing the quality of elementary and high schools."

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