Tax Analysts Blog

Kansas Shows How Not to Design a Tax Cut, Not That All Tax Cuts Are Bad

Posted on Jun 8, 2017

The great supply-side experiment is over. After years of cratering revenues and hard choices about spending cuts, the Republican-controlled Legislature has pulled the plug on Republican Gov. Sam Brownback’s 2012 tax program. Both the Kansas House and Senate overrode Brownback’s veto June 6 by wide majorities. Already commentators are rushing to declare all tax cuts obsolete as a result of Kansas’s experience, but that would be a gross overreaction to what actually happened.

In 2012, a Republican-dominated Kansas began to explore a major tax cut. As Martin Sullivan explained, the process for the creation of the tax cut was extremely flawed. Originally, Brownback wanted a much smaller bill. His original proposal called for lower rates to be paid for by a repeal of deductions and tax expenditures. The Kansas House, however, left out most of the plan’s pay-fors. The Kansas Senate then passed what it thought was a placeholder bill, which was even more generous than the House version. State senators were then surprised when the House passed, and the governor signed, the more generous placeholder, not giving either chamber a chance to revise the measure to restrain revenue loss.

The Kansas tax cuts eliminated about 13 percent of state revenues. The top income tax rate dropped from 6.4 percent to 4.9 percent. And, most importantly, it bizarrely exempted all revenues from passthrough businesses and self-employed individuals from taxation. The last point is key. 

The effect was probably predictable to all but the most dedicated supply-siders. State budget deficits ballooned. The Legislature was forced to slash spending (so much so that the Kansas Supreme Court said it had gone too far cutting education). But nothing worked. Brownback narrowly won reelection in 2014 and refused to roll back the tax cuts, including the ill-conceived passthrough provision. When the evidence mounted that state growth wasn’t all that much better than states without tax cuts (or even, worse), Republicans began turning on Brownback. Earlier this year, the Legislature narrowly failed to overturn a veto of a bill that would have ended the tax cuts. Finally GOP lawmakers lost patience with Brownback’s lack of a solution and obstructionism and held a second vote June 5, passing a repeal measure. This time most Republican leaders in the House and Senate supported repeal (the most notable was GOP House Speaker Ron Ryckman, who up until the Tuesday override vote was a supporter of Brownback’s plan). 

There are lessons to be drawn from the Kansas experience, but one of them isn’t that all tax cuts are bad. Brownback’s plan was poorly constructed. The passthrough provision was a last-minute addition that wasn’t properly researched. The Legislature didn’t seem to understand how a full exemption of passthrough income would affect taxpayer behavior. In the end, the many employees reclassified themselves as passthrough entities (including University of Kansas basketball coach Bill Self, the state’s highest paid employee) to avoid taxes on their income. That kind of a provision is simply bad, poorly constructed policy.

There are some parallels between President Trump’s tax plans and Brownback’s tax cuts. But they aren’t enough for Kansas to provide significant evidence that congressional Republicans should steer clear of any tax reform plan that lowers corporate and individual income tax rates. Lowering the corporate tax rate and consolidating individual income tax brackets can still be beneficial to the overall economy without catastrophically increasing the deficit. Federal lawmakers just have to hew closer to Brownback’s original proposals, which included pay-fors and took into account the potential effects of lost revenue. 

In the end, the lesson from Kansas is to avoid passing a poorly constructed, hastily thrown together tax reform package. It isn’t that lawmakers should never consider lowering rates again.

Read Comments (5)

Edmund DantesJun 12, 2017

Thanks for your even-handed review of what transpired with the Kansas tax cut.

Next, would you do a similar job on how CT proved that the other side of the Laffer curve is quite real, with their equally disastrous tax increase?

As reported in The Wall Street Journal, CT enacted a "small" tax increase on top earners, pushing the top income tax rate from 6.5% to 6.99%. Using static forecasting, this was expected to boost tax revenue by about 5% from this group of top taxpayers. Imagine the surprise of the politicians when the revenue from this group went down by 45%. I believe that is actually 45% below expectations, not 45% below the prior year collections, but in any event the dollars collected from the targeted group went down sharply.

So tax increases can lose revenue as much as tax cuts do. Supply side economics is alive and well.

Unfortunately for CT, the damage done by ill-conceived tax hikes to pay for unconstrained government spending is far greater than the loss of revenue in any one year. Last year GE moved its headquarters out of the state, this year Aetna will follow suit. No large companies are moving into CT, given its draconian taxes and blatant anti-business bias.

Did businesses flee Kansas because of their tax cuts? The CT economy is actually contracting, because so many more people are moving out than are moving in. Those moving in tend to not be as prosperous as those leaving.

As bad as you may think Kansas to be, its prospects are certainly brighter than Connecticut's.

Travis RechJun 13, 2017

Hasn't the problem for CT always been "its where rich people live, but not where they work?" That creates a lot of weird priority incentives for government and citizens alike. I'll defer to your firsthand knowledge of the situation but my mental framework has always been you have citizens (and government) demanding first class services to accommodate the high standard of living of its citizens, but the economic base is transient in the long term. Make the tax burden too onerous and the CT tax base drifts to New Jersey or Long Island or upstate NY, perhaps not overnight but over the course of a generation. I'm not sure I see an easy solution.

Edmund DantesJun 15, 2017

At one time CT had a far more robust manufacturing base. Bridgeport was once a wealthy city, with successful factories. The prosperity of the state was bolstered by the fact that it had no income tax. That's why so many of the rich who worked in New York City chose to live in CT. The southwest corner of the state is still fairly prosperous, with "first class" government services.

That prosperity led to excessive government spending and too-rich contracts for state employees. Then Lowell Weicker campaigned for governor on a platform of not adopting an income tax. Naturally, that the was the first thing he did. That eliminated the attraction of CT for the wealthy who work in New York.

But those wealthy were already here with their families, so the damage to the state was not immediately apparent. But at about that same time, the state government became more and more hostile to businesses, on both the regulatory and taxation front. It didn't happen overnight, but now CT has a reputation as being the worst state for business. There were several cases of national companies shuttering their operations in CT because costs are so high compared to other areas in the US. Even with high labor costs, many CT residents don't feel they are getting ahead because of the high cost of living, so employee morale has been low. Another reason to avoid the state.

Hartford was once the insurance capital of the world. A variety of terrible government policies have destroyed that, hollowing out the city. They are on the verge of bankruptcy, because they also have unsustainable union contracts. Even with a property tax mill rate of 70 Hartford politicians can't raise enough money to run the city.

The worst part of the situation is that those people with the talent to lead the state out of this morass seem to have already relocated out. The political leadership of both parties is very weak, to be diplomatic. The state is rudderless at the moment, with sporadic attempts at crony capitalism to try to retain a few large employers. Most people understand what needs to be done, no one is willing to do it.

Mike55Jun 16, 2017

CT is in the same position as the rust belt states.* It has several of the old/small New England manufacturing cities that are terribly situated for the 21st century (e.g., Waterford, New Haven, Bridgeport, etc.). And unlike its neighbors, it lacks an economically prosperous megacity to offset the burden.

As Edmund points out, CT's elected officials are widely perceived as having responded poorly to the State's challenges. At best they've failed to do anything to improve the situation, at worst they're hastening the decline.

*New England manufacturing job loss doesn't get much attention because a lot of the jobs remain inside the U.S., and NYC and Boston mitigate the regional economic damage. Unless you are from CT, a story about jobs being relocated from Bridgeport to Huntsville probably isn't going to capture your attention.

Mike55Jun 14, 2017

Fully agree with all of this, great article.

Another lesson from this mess: federal tax theory doesn't translate very well to SALT. In this specific case people like Bill Self likely reinvested (or spent) most of their tax savings outside Kansas. So even if the "great supply-side experiment" had worked flawlessly, it still would have been unaffordable from a Kansas perspective. Too much of the resulting benefit would have been captured by other states.

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