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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.

Gage Skidmore/FlickrGage Skidmore/Flickr

"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 "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 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.

Photo Credit: Gage Skidmore/flickr

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  • Crusty Juggler - Elite||

    Beloved interns provide alt text.

  • Ken Shultz||

    The suggestion that the government will ever be so flush with cash that it will cut spending is absurd.

    Even Keynes knew that you could count on the government to spend every penny they get their hands on.

    The first step in stopping drunken sailors from spending all of your money is to stop giving them more of your money to spend.

    The only reason governments cut spending is because they can't get their hands on more money. Sometimes that's because the economy takes a nosedive and that cuts into their ability to tax. Sometimes that's because the taxpayers are unwilling to pay any more in taxes. Regardless, it's always about limiting their ability to tax.

    Prop 13 was blamed for everything under the sun--from the early release of prisoners to failing public schools. California has shown with its bullet trains, flush pension obligations, etc., however, that it doesn't matter how much income California gets in taxes, they will spend every dime of it and then however much they can float in debt.

    Prop 13 wasn't the cause of California's overspending. Prop 13 was merely stopping Sacramento from spending more money.

    Say it over and over to yourself until it becomes clear:

    "The government will never be so flush with cash that it decides not to spend it".

    "The government will never be so flush with cash that it decides not to spend it".

    We can never balance the budget through higher taxes. We can hold back spending by cutting them.

  • Diane Reynolds (Paul.)||

    The suggestion that the government will ever be so flush with cash that it will cut spending is absurd.

    Even Keynes knew that you could count on the government to spend every penny they get their hands on.

    The first step in stopping drunken sailors from spending all of your money is to stop giving them more of your money to spend.

    I agree.

    Tax increases are spending increases.

    Starve the beast is a legitimate strategy.

  • chemjeff||

    It is, but it's not going to work via tax cuts. It has to happen via restrictions on borrowing.

  • WakaWaka||

    That may work at the federal level, but it would have an insignificant impact on the state and local level, where debt service payments typically comprise less than 5% of total expenditures. You restrict borrowing and the impact on reducing the size of government is basically zero, beyond the federal government

  • Ken Shultz||

    Tax cuts are a restriction on borrowing.

    The less money they have to pay interest with, the more interests they're charged to borrow, the less they can borrow.

  • Diane Reynolds (Paul.)||

    I agree with Ken.

    There's also a difference between the locality and the federal government. Yes, the feds can borrow by printing money. The locality can't. So if you cut off or restrict their funding, at some point, discipline will have to kick in.

  • ||

    The first step in stopping drunken sailors from spending all of your money is to stop giving them more of your money to spend.

    Assumes drunken sailors won't use physical force or the threats of violence to get what they want.

  • Zeb||

    Yeah, when the drunken sailors are the ones setting the tax rates and the spending rates, to stop giving them more of your money to spend is the tricky part. None of it is likely to change unless we start electing legislators who are serious about cutting spending and taxes.

  • Diane Reynolds (Paul.)||

    Meh, I carry guns.

  • soflarider||

    So do the "sailors".

  • Juice||

    Even Keynes knew that you could count on the government to spend every penny they get their hands on.

    and then some!

  • Fred G. Sanford||

    What hasn't worked is the "starve the beast" method. People simply enjoy their lower taxes while continuing to insist on government benefits. You have to cut the benefits.

  • JFree||

    Chances that any pol learns the lesson that cutting spending is more important than cutting taxes - zero.

  • Citizen X - #6||

    Promising to cut taxes is a nice way for politicians to earn the votes of a certain type of disaffected small-government weirdo, but actually cutting spending is how politicians lose their jobs.

  • JFree||

    Ok. Let's rephrase then:

    Chances that any pol learns that doing what is important is more important than doing what gets you reelected - zero

  • NoVaNick||

    Hence why Reagan was so popular-he ballooned spending, setting a precedent for future presidents.

  • The Last American Hero||

    Because deficit spending didn't happen until 1980?

  • ||

    Promising to cut taxes is a nice way for politicians to earn the votes of a certain type of disaffected small-government weirdo, but actually cutting spending is how politicians lose their jobs

    ^ This.

    Cutting taxes = good.
    More spending = good.

    More taxes = bad.
    More spending = good.

    One party is all for lowering taxes. The other party is all for increasing spending.

    It's not at all hard to see how we got where we are.

  • ||

    That second one was supposed to be "less spending = bad," but you knew what I meant.

  • ||

    proto weigel

  • chemjeff||

    I think what this really means is that we in the small-government camp need to change focus from cutting taxes, to restrictions on borrowing on the part of the government. Both parties have more or less figured out that people don't want to pay more in taxes so they have decided to tax future citizens instead via debt. When the ability of the government to accrue ever more debt is curtailed, then maybe we will see a reduction in spending. I am not sure what form this limitation would take, but it certainly needs to happen.

  • ||

    I think what this really means is that we in the small-government camp need to change focus from cutting taxes, to restrictions on borrowing on the part of the government.

    No shit. Fuck You, Cut Spending!

  • Fuck You - Cut Spending||

    You rang?

    .

  • Rat on a train||

    Get to work.

  • WakaWaka||

    That may work at the federal level, but it would have an insignificant impact on the state and local level, where debt service payments typically comprise less than 5% of total expenditures. You restrict borrowing and the impact on reducing the size of government is basically zero, beyond the federal government

  • JFree||

    I agree. But as long as the US dollar is the reserve currency; then our debt is what finances global trade. That doesn't solve any problem. Foreigners will only carry that debt for as long as we spend money doing what they would do. The second we stop, that debt burden will transfer to our kids (permanently) and to ourselves temporarily (via a much lower standard of living).

    Basically we're in Maine now. Can't get anywhere from where we are. We chose to be here. The only end-game is gonna be constraint when the game ends - at a time chosen by others.

    Other countries have written that sort of debt ceiling into their constitution - Switzerland, Germany, Hong Kong, even Italy and Spain recently. But they aren't reserve countries. And the reality is that even Kansas (like most every state) has that sort of ceiling in their constitution. What they lack is the balls to restrain spending - or to prioritize the spending cut spinach before tax cut dessert.

  • Will4Freedom||

    "Both parties have more or less figured out that people don't want to pay more in taxes
    so they have decided to tax future citizens instead via debt. "

    Yes. I was blissfully unaware in my youth, but watching the debt clock spin into the TRILLIONS... now 20 Trillion!... and seeing the interest payments on that alone make
    me sad for my kids and grand-kids. The future does not look good.

    How can we cut taxes until we pay down dome debt? And we can't pay down debt until we have a surplus in the Treasury. And we won't have a surplus until someone with balls actually cuts spending.

    I fear high taxes are here to stay, for my lifetime at least.

  • Diane Reynolds (Paul.)||

    Sales taxes are inherently regressive

    Maybe, sometimes, not always, but income taxes are inherently immoral.

  • mtrueman||

    A flat tax of 13% is preferable. This is the case in Russia. Food trucks, too.

  • Ken Shultz||

    They're also the most voluntary form of taxation--you don't have to pay the tax if you don't want to.

    They're the most efficient form of taxation--every individual gets to measure the cost of the tax within the context of every transaction they make. It's not like taxing other things--like profits or income--where you're taxed regardless of any single transaction.

    And when people say that sales taxes are regressive, what they really mean, whether they realize it or not, is that sales taxes aren't socialist.

    Income taxes and corporate taxes are redistributive--they're half the equation of "from each according to their ability, to each according to their need".

    Faulting a tax for being insufficiently socialist is like faulting a woman for being insufficiently ugly.

  • Diane Reynolds (Paul.)||

    Income taxes and corporate taxes are redistributive--they're half the equation of "from each according to their ability, to each according to their need".

    Not only that, they subject the populace to a massive police state and domestic spying regimen. Plus, define income.

  • Ken Shultz||

    +1

  • Zeb||

    The huge disclosure of personal information is my biggest problem with income tax (though far from the only one). It also puts huge burdens on employers. Imagine how different employment situations would be if tax collection wasn't involved.

  • The Last American Hero||

    They aren't even as regressive as many think, nor is the income tax a progressive as commonly thought.

    Food and rent - ie, what the poor spend most of their income on, is typically exempt.

    However, let's look at the beloved income tax. That loaf of sales tax-free bread you bought at the store is loaded with income tax - paid by the grocer, the baker, the farmer, etc. all the way down the line. But that tax is hidden from the guy buying the "tax-free" bread.

    Bottom line, government is going to get their nugget, and anybody that can pass on their share of the nugget to the next guy will do so.

  • Juice||

    Food and rent - ie, what the poor spend most of their income on, is typically exempt.

    I've only lived in a couple of places that didn't have a sales tax on everything including food. Never seen a rent tax though.

  • chemjeff||

    "Never seen a rent tax though."

    it's called property taxes

  • Juice||

    Well, that's not a tax on rent. It's a rent itself.

  • ||

    it's called property taxes

    Yeah, but for whatever reason most renters believe that they don't pay those. The same way most employees believe that they don't pay the employer contribution to payroll taxes.

  • Jerryskids||

    And of course all this handwringing over the sorry state of Kansas' budget begs the question of the state of the budgets of the residents of Kansas. Despite the constant drumbeat of when the economy is bad government needs to increase spending because of so many poor people and when the economy is good government needs to increase spending because we can afford it, if people can take care of themselves, why do they need so much government? How are Kansans doing with the government starving for cash and if they're doing just fine why should they give a shit how the government's doing?

  • Sam Grove||

    This post needs editing.

    "that it induced it induced"

    "making made the initial revenue"

  • Diane Reynolds (Paul.)||

    New guy needs some time to brush up on his typing.

  • ||

    Thanks for this summary. I haven't followed the Kansas Tax Cut experiment and wondered what went wrong.

  • Uncle Jay||

    RE: 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.

    Trying to convince either party member that spending is one of the leading causes (if not the main cause) of government indebtedness is like explaining calculus to an earthworm.
    It will only annoy the earthworm.

  • The Last American Hero||

    I don't see failure of the tax cuts, I see failure on the spend side - they starved the beast but chickened out when it came to actually cutting spending.

  • BearOdinson||

    I have lived in Kansas for 3 1/2 years. I am doing fine.

    The KDOT is freaking absolutely useless, but there is no evidence that it ever did a good job, regardless of what the budget is doing.

  • Ken Hagler||

    So in other words the tax cut experiment was a success because Kansas residents had less of their money stolen for 13 years.

  • Juice||

    Thank you.

  • Zeb||

    Success or failure means nothing if you don't define standards for success.

    If people paying less in taxes for 13 years was the standard for success, then yes, it was very successful.

    And under the standard of "did it spend a bunch of money on subsidized insurance", Obama care has been a tremendous success.

  • Lester224||

    The advertised result was that the tax cuts would grow the economy, add more jobs and float all boats. That part of the experiment failed.

  • Diane Reynolds (Paul.)||

    Yeah, like I give two shits if the city's 'chief resiliency officer' might not get her pension on her six figure income.

  • Juice||

    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.

    Well, I never bought into the idea. I kind of thought that the Laffers and Norquists never really believed it either and it was just a way to sell it. Cutting taxes is still preferred whether spending is reduced or not. To me it doesn't matter how much the beast is spending or what effect starving it has. The goal is reducing violations of the NAP, not the fiscal health of the state.

  • Zeb||

    I'm not convinced that tax cuts not accompanied by spending cuts actually reduce NAP violations. Someone is still paying for all that spending, and it's not voluntary. Without real structural changes, someone's getting fucked, one way or another.

    I'll still support about any tax cut, but without spending reductions (and accompanying reductions in the scope of government), it's questionable how much it actually accomplishes.

  • Juice||

    I'm not convinced that tax cuts not accompanied by spending cuts actually reduce NAP violations. Someone is still paying for all that spending, and it's not voluntary.

    Well, finding the money to pay back the debt doesn't necessarily have to violate the NAP. It just usually will. There's nothing stopping the state from attempting to finance or repay their debt through voluntary means in the future. Sure there's a slim chance that will actually happen, but reducing taxes without reducing spending definitely reduces harm in the present. It only kicks harm down the road if in the future the debt is repaid through involuntary means, which I grant is the most likely case. It's just not necessarily guaranteed.

  • chemjeff||

    Cutting taxes now, without reducing spending now, may reduce NAP violations for current taxpayers but only increases it for future taxpayers, since the spending is paid for via debt instead of via taxes.

  • Juice||

    It's not the anti-anti-immigration articles that make Reason cosmotarian. It's articles like this.

  • NotAnotherSkippy||

    20 Trillion times this. Reason has no trouble increasing the size of the welfare state when it furthers their social goals. As always they are socially liberal and fiscally convenient.

  • Michael Hihn||

    Another goober bullshitting about the meaning of "socially liberal."
    What you describe is fiscally liberal, Skippy.

    Plus it never happened, so you're also shameless.

  • Tony||

    Or we could just stop listening to budget austerity fetishist who've never been able to prove their case once in the history of the goddamn world and who tend to endorse political parties that only do half the job anyway.

  • Juice||

    Or we could just stop listening to budget austerity fetishist who've never been able to prove their case once in the history of the goddamn world

    "Budget austerity" means cutting spending and raising taxes. I've never seen a state/country do that. I'm curious to see an example if it exists.

  • Michael Hihn||

    "Budget austerity" means cutting spending and raising taxes.

    Not on THIS planet.

    Merriam-Webster defines it as:
    "A situation in which there is not much money and it is spent only on things that are necessary"

    I'm curious to see an example if it exists.

    Simple. Once on

  • Michael Hihn||

    Finishing comment: Simple. Once on knows what it means.

    Tony ridicules austerity -- but closes his eye to the MASSIVE failures of virtually everything he supports (in economics)

  • KerryW||

    I would like to see an analysis of how much of the problem was from the non-removal of some deductions, exemptions, and tax credits. Most responsible tax-cutting plans lower the rate while broadening the base. If you don't broaden the base, of course you're going to have a problem.

    Also, lower a state income tax rate is not going to have as large an effect on the state's economy as doing the same at the federal level because federal rates are so much higher -- dropping the state rate by 10% (e.g., 10% to 9%) won't have as big an effect as dropping the federal rate by 10% (say 40% to 36%). And the failure of it working at the state level doesn't necessarily imply it won't work at the federal level (especially if the state experiment didn't broaden the base).

  • Lester224||

    It's easy to pass tax cuts if a legislature leans right. It's very difficult, politically, to remove deductions and exemptions. The people who donated money to elect those who will pass tax cuts will withdraw support next time around if their favorite deductions and exemptions are eliminated.

  • Michael Hihn||

    I would like to see an analysis of how much of the problem was from the non-removal of some deductions, exemptions, and tax credits

    Your own very next sentence.. That's HOW the base is broadened.
    Won't happen, now that the middle class sucks so heavily on the loopholes teat,

  • Domestic Dissident||

    This article completely fails to mention one of the most important aspects of all this, which is that the Kansas legislature and governor did in fact try to cut state spending, and were told by one of their higher state courts that they can't. Which basically left them no choice but to raise taxes to balance the budget again (duuuuuuuuuuuh!)

    So, the experiment only "failed" because a cabal of lefty judges never really permitted it to be fully carried out.

  • Enemy of the State||

    Tax cuts need to "pay for themselves" only if you are some statist fuck who believes government owns all we produce....

  • Michael Hihn||

    Or a libertarian/conservative fuck, too stupid to know he just defended government debt.

  • Michael Hihn||

    Did Brownback sign the bills?

  • swampwiz||

    It's good to see Reason declare "starve the beast" as intellectually abominable.

  • Telcontar the Wanderer||

    See Jack Lower Taxes.

    See Jack Keep Spending The Same.

    See Jack Go Bankrupt.

    See Jill Squeal "MARKET FAILURE!".

    See Jill Cum All Over Herself From Sheer Self-Congratulation.

    See Libertarian Roll Eyes.

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