Easy call, no State has tax cut its way to solvenc

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Kansas' Tax Cut Experiment Was A Predictable Failure

People like lower taxes, just not lower spending. Kansas is a lesson that you can’t have the former without the latter.

Ben Haller|Jun. 19, 2017 11:45 am

"What's the matter with Kansas?" In 2004, Thomas Frank asked the question fearing a "right-wing class war grown so powerful" that it induced it induced "the common people" to vote against their own interests. Now, 13 years later, pundits are asking the same question—but under drastically different circumstances.

Headlines like "How the grand conservative experiment failed in Kansas" and "Trickle-down economics is a nightmare. Kansas proved it" have been dominating the news out of Kansas this month.

On June 6, the Kansas legislature voted to roll back years of tax cuts championed by Republican Gov. Sam Brownback. Many in the media could not resist gloating about a supply-side policy failure in the home state of the Koch brothers.

Comparisons between Brownback's policies and Trump's tax plan quickly followed suit, with warnings about how the whole nation could soon suffer from a supply-side induced fiscal crisis.

The state certainly finds itself in a fiscal crisis, but chalking up its woes solely to the governor's tax-cutting is a gross oversimplification. As with many economic policy issues, the reality is a lot more complex than the headlines let on.

In order to understand what's the matter with Kansas in 2017, one needs to go back to 2010, the year Sam Brownback was elected governor. Brownback had pledged to reform the state's tax code, but offered no concrete plan.

A year later, Brownback finally presented what would be dubbed "the great Kansas tax cut experiment." He proposed phasing out state income taxes over several years and eliminating taxes for certain businesses—specifically, pass-through entities, which pay taxes through the individual tax code instead of the corporate tax code.

Brownback promised that some revenue would be recouped through the elimination of deductions, exemptions, and tax credits.

Those tax cuts eventually passed—though the exemptions, deductions, the income-tax credit were left intact, largely for political reasons—and the state began to limp from one budget crisis to another as tax revenue caved and failed to cover the state's spending.

In 2014, the state's bond rating was downgraded as the crisis escalated. All the while Brownback remained publicly unfazed, and went on to win a contentious battle for reelection that same year.

But while Brownback got a second term, his experiment won't. A $900 million budget hole finally convinced Kansas legislators that the grand experiment must come to an abrupt end.

What went wrong? First, the legislature failed to eliminate politically popular exemptions and deductions, making made the initial revenue drop more severe than the governor planned. The legislature and the governor could have reduced government spending to offset the decrease in revenue, but they also failed on that front.

Government spending per capita remained relatively stable in the years following the recession to the present, despite the constant fiscal crises. In fact, state expenditure reports from the National Association of State Budget Officers show that total state expenditures in Kansas increased every year except 2013, where expenditures decreased a modest 3 percent from 2012. It should then not come as a surprise that the state faced large budget gaps year after year.

In addition to a failure to control government spending, Kansas officials failed to ditch one of the worst elements of the tax plan: the total elimination of taxes on pass-through entities. Pass through entities are, to put it simply, businesses that pay taxes through the individual income tax code as opposed to the corporate code.

It's particularly bizarre that this provision survived because even those who supported Brownback's other tax cuts, such as the Tax Foundation, felt this part of the plan went too far and encouraged tax avoidance.

Instead of policies like eliminating tax loopholes, lowering tax rates, and broadening the tax base—the most common elements of tax reform—the state created arguably one of the largest loopholes that could be found in any state tax code and exempted businesses that employ over 50 percent of the state's workforce.

You would have to shoot state accountants in the foot if you wanted to make it any harder for them to balance the budget.

Finally, Brownback compounded those mistakes by doing the exact opposite of what an ardent supply-sider, or any fiscal conservative, should do next: he raised taxes.

In fact, the state's 2015 tobacco tax increase was only one-third what the governor wanted; the legislature rightly reduced it because they felt Brownback's proposal would disproportionately affect low income people and drive business out of the state.

The governor also pushed for an increase in the state sales tax from 6.15 percent to 6.5 percent (the rate people end up paying is even higher when local taxes are taken into account), and he got it.

Sales taxes are inherently regressive, but in Kansas they are particularly so because it's one of only a few states that tax food.

Even those regressive, poorly planned tax increases failed to solve the budget crisis.

Still, Kansans can take comfort in knowing that their state is not the worst of the worst when it comes to tax policy (cue Illinois, center stage). Media coverage of the Kansas tax experiment has become part of of an ongoing game that attempts to blame the other side for every problem under the sun, while denying any criticism of your own camp.

In doing so, the nuance and complexity of tax policy is lost. Many news outlets seem far more interested in pushing narratives of Republican failures than using the state to highlight the fiscal problems practically every state is experiencing.

Plenty of other states are barreling towards fiscal insolvency through the tried and true "tax and spend like there's no tomorrow" method (quite the opposite of suffering the consequences of some "trickle-down" tax experiment).

Of course, to label California's fiscal mess, for example, as solely the product of liberal policy failures would also be disingenuous; the state's past Republican governors and awful initiative system have played a role.

Yet the same people who try to pin Kansas' problems on conservative fiscal policy would have you believe that places like California, in worse shape than Kansas, are doing just fine—thriving even.

Liberals have, however, made one criticism that the failure of the Kansas experiment seemed to verify: tax cuts do not necessarily pay for themselves.

Fiscal conservatives, libertarians, and anyone else who might be tempted by the ideas of people like Arthur Laffer, who advised Brownback on the tax plan, and tax reform advocate Grover Norquist (who originally supported the experiment) might want to look at these ideas a bit more skeptically.

Laffer and Norquist may have the right idea when it comes to lowering rates to spur economic growth, but lower taxes by themselves are not a cure-all for a state's woes. Excessive regulation, budget insolvency, corruption, older demographics, and a whole host of other issues can slow down economic growth even in the presence of a low-tax environment.

If government is already small and efficient, lower taxes (and by extension lower revenue) may stop it from getting much bigger, but anyone who thinks starving bloated government of revenue will decrease spending is kidding themselves.

Politicians, both at the state and federal level, have long found ways to kick the can down the road with creative accounting that temporarily patches over problems, while ratcheting up long-term debt obligations. Kansas is no exception.

With states from coast-to-coast, both red and blue, marching towards fiscal insolvency, it seems rather pointless to observe Kansas' failures and proclaim "Look! Republicans can be fiscally irresponsible too!" Indeed they can.

Rather than assigning blame, then, let's focus on fixing the problem. Paying lip service to fiscal responsibility is not enough. Cutting taxes is easy. Cutting spending is a necessary, and far more difficult, prospect.

If Kansas is a harbinger for things to come under Republican budget-makers, perhaps no one should hold their breath.

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