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.