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The comeback state of 2019: Kansas economy rebounds from tax-cutting disaster

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Here's America's most improved state for business in 2019
Key Points
  • Two years after repealing steep tax cuts, Kansas' budget is back in the black.
  • Other improving states include North Dakota, North Carolina and Nebraska.
  • The year's biggest declines belong to Michigan, California, Idaho, Massachusetts and Pennsylvania.

Residents of one midwestern state can be forgiven if they have a feeling they are not in Kansas anymore. The Sunflower State finishes a respectable No. 19 overall in this year's CNBC America's Top States for Business rankings. That is a 16-place jump from 2018, making Kansas this year's most improved state.

One year ago Kansas was still nursing a hangover from a disastrous tax-cutting experiment by former Republican Gov. Sam Brownback, who slashed individual income-tax rates and eliminated taxes on "pass-through" income from certain businesses. Even though a bipartisan super-majority of the state legislature had repealed the Brownback program over his veto in 2017, the state was still dealing with a residual $351 million revenue shortfall for fiscal 2018, according to the Center on Budget and Policy Priorities. In addition to its No. 35 overall ranking last year, Kansas finished a dismal No. 45 in the Economy category.

A budget surplus on the prairie

This year the full force of the repeal has taken effect: The state is running a budget surplus. In addition to the 16-point improvement in its overall ranking, Kansas rises 16 points in the Economy category.

"We are returning to our roots as a very progressive, thoughtful, forward-looking state," Gov. Laura Kelly, a Democrat, told CNBC in an interview. Kelly was elected last year as part of the backlash over the Brownback plan.

"Kansas for years now has been at the low end of all economic metrics," Kelly said. "That's changing."

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But the era of good feelings in Kansas could be short-lived. The nonpartisan Kansas Legislative Research Department forecasts revenue to level off and begin declining as soon as next year as growth slows. Republicans in the state legislature are pushing to restore some of the tax cuts, arguing that the Brownback plan failed not because it cut taxes but because it failed to keep spending in line.

Even Kelly acknowledged that merely reversing the Brownback tax cuts is not enough to put the state on solid ground.

"We will be studying our entire tax structure, because it's way out of whack right now," she told CNBC. "We want to take us back to what works for Kansas, which is really essentially what we call the three-legged stool: Balance out our property taxes, our sales tax and our income taxes."

Other states on the rise

Other states that bettered themselves in 2019 include North Dakota, which seems to have found some stability after its initial boom-bust cycle in the oil business. The Peace Garden State rises 12 spots to No. 17 overall, with solid improvements in the categories of Workforce, Economy and Education.

North Dakota's biggest issue is its severe worker shortage. Unemployment in the state for May was a mere 2.3%. With economic growth rising to 3.5% in the fourth quarter of 2018, the low unemployment is a recipe for trouble.

No. 3 North Carolina vaults into the top five from ninth place last year, thanks to solid improvement in its economy. In fact, this year's CNBC study rates the Tar Heel State's economy the best all around in the nation, with a grade of A+. While economic growth last year only matched the national rate of 2.9%, other aspects of the economy are in great shape. Home prices appreciated by nearly 7%, according to the Federal Housing Finance Agency. A healthy budget surplus helps earn the state a Triple A bond rating from Moody's Investors Service.

Nebraska also rises six places to No. 8 overall on the back of an improving economy. As a farm state, Nebraska is particularly vulnerable to the trade war. But it has weathered the storm for now.

The biggest losers

The year's biggest decline belongs to Michigan, which falls 13 spots to No. 24. Just two years ago Michigan was the most improved state in our ranking. A cooling housing market is not helping the state's economy. While prices rose a healthy 7.4% last year, according to the FHFA, that is down from an 8.6% increase in 2017 despite continued tight inventories.

Michigan's infrastructure is lacking as well. The five-year-old Flint water crisis is just the highest-profile example of the state's utility woes, with an estimated $13 billion in repairs needed over the next 20 years to fix the state's drinking and wastewater systems, according to the U.S. Environmental Protection Agency.

Demonstrators in Detroit demand action about the water crisis in Flint, Michigan.
Chip Somodevilla | GGetty Images

Other decliners include California, falling seven spots to No. 32. The Golden State's economy is still among the fastest growing in the country, but the housing market is in turmoil. Price appreciation has leveled off considerably, to about 5% last year from nearly 9% in 2017. Prices are continuing to cool this year, which could help ease the state's affordability crisis. However, housing starts have also leveled off and foreclosures are rising.

In addition to the issues in its economy, California notches its usual poor rankings in Cost of Doing Business (highest in the country), Cost of Living (second highest, after Hawaii) and Business Friendliness (No. 50). But the state is still No. 1 for Technology & Innovation and for Access to Capital.

Idaho (No. 18) falls seven places as well. There, the economy is cranking along and the housing market is on fire. But that growth is leading to rising costs. The state finishes No. 12 in Cost of Doing Business, from No. 4 in 2018. It finishes No. 20 for Cost of Living, down from 13th place a year ago.

No. 14 Massachusetts and No. 28 Pennsylvania each drop five spots. Massachusetts slips in Workforce, Economy and Infrastructure. Pennsylvania's Workforce ranking plunges to No. 31 from No. 13. The state's unemployment rate — 3.9% in May — is now roughly in line with the national average. That means fewer available workers.

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