Kansas is collecting hundreds of millions of dollars less than its budgeted projections. That number has a lot of people in a lot of states wondering what happened.
Here is why answering that question is important. In 2012 Kansas enacted what Nick Johnson at the Center on Budget and Policy Priorities called the largest tax cut ever. The state repealed its top individual income tax bracket of 6.45 percent and lowered its other two brackets of 3.5 percent and 6.25 percent to 3 percent and 4.9 percent, respectively. More significantly, the state exempted from taxation all income earned by passthrough entities.
Everybody knew the tax cuts would cost money; the fiscal note for 2014 estimated that the cuts would cost $800 million in 2014. But the tax cut package was sold as a panacea for all that ails the Kansas economy. Gov. Sam Brownback (R) predicted that the tax cuts would spur economic development, investment, and a lot of job creation. Indeed, Arthur Laffer, who developed the Kansas tax cut plan, practically guaranteed success. But it didn't work. The Kansas economy is stagnating, the deficit has grown, and the state's bond ratings have been embarrassingly downgraded.
The tax cuts' failure to magically transform Kansas has prompted much discussion. Michael Leachman and Chris Mai at the CBPP wrote a paper skewering the Kansas experiment, saying the tax cuts cost money, the benefits inured to the rich, and the economy took a hit because of less government spending. They say that as a result, the state's economy remains in the doldrums. The CBPP opposed the Kansas tax cuts from the beginning, and Leachman and Mai's paper is one big "I told you so." Even The Wall Street Journal wrote a piece noting that the Kansas failure has caused conservative politicians in other states to rethink significant tax cuts.
Conservatives in Kansas admit that the tax cuts did not result in the expected economic boost. Some have blamed the failure on President Obama (no, really). And some conservatives say the tax cuts did not go far enough to significantly stimulate the economy, which seems like a silly argument because the tax cuts were huge.
I think it's too early to tell if the Kansas experiment was a failure. It may be that the tax cuts have not been given enough time, because tax changes rarely have immediate consequences at the state level. I have often pointed out that tax increases almost never harm the economy in the short run. Neither businesses nor people move immediately after a tax increase. Corporations don't sell their plants and equipment and move their workforce on short notice. And people don't sell their houses, quit their country clubs, or take their kids out of school because the income tax rate goes up. I believe that increasing tax burdens harms economic development in the long run -- it doesn't happen overnight.
Why would tax cuts be any different? Individual tax cuts will not cause a flood of new residents in the short run, and the ill-advised changes to exempt passthrough income will not cause budding entrepreneurs to immediately move to Lawrence or Topeka. But I do think those kinds of tax changes will have positive long-term effects on the overall economy.
So what went wrong in Kansas? I think Brownback and Laffer oversold the short-term benefits of substantial tax cuts. Those benefits did not materialize. But it may be too early to know if the Kansas experiment is a long-term failure. Only time will tell if the CBPP is right.
***This post is an excerpt of an article that first appeared in State Tax Notes.***