25 January 2018 | Tax and budget

Stark realities about Kansas tax ‘experiment’ highlighted in new research

Kansas Action for Children
Jan. 25, 2018

Kansans watched firsthand as Governor Sam Brownback’s “real live experiment” in tax policy turned into an economic catastrophe for the state.

report out this week from the Center on Budget and Policy Priorities offers fresh details about the failed tax plan and the lessons that other states should take from our state. While tax-cut proponents have argued that Kansas’ experiment was imperfect and should be dismissed, the evidence shows otherwise.

Here are three takeaways:

No. 1: The Kansas experiment was a test of supply-side economics. It failed.

In 2012, tax-cut supporters said that by sharply curtailing taxes on high-income people and businesses, Kansas would boost its economic competitiveness. But the results were disappointing. Economic growth lagged neighboring states and the country as a whole. Kansas also suffered five years of budget shortfalls that forced cuts to crucial government services, three credit downgrades, and repeated sweeps from highway and state retirement funds.

No. 2: Kansas cut spending to the bone. Cutting more would have left the state worse off.

Some argue that the tax cuts didn’t produce economic growth because lawmakers didn’t follow it with spending cuts, but this does not match reality. State spending was tightly restricted after the tax cuts. Between fiscal years 2012 and 2016, Kansas’s General Fund spending rose only 0.3 percent without adjusting for inflation and fell 5.5 percent after adjusting for inflation and population growth. If Kansas had cut spending more, its economic and job growth would have been even more lackluster.

No. 3: Under the plan, businesses didn’t behave the way supply-side theory expected.

The “LLC Loophole,” which exempted income paid to business owners from taxes, should have prompted the formation of many new Kansas businesses — by tipping their potential bottom lines from unprofitable to profitable and by attracting pass-through businesses from other states. Yet there’s no evidence that that happened. Moreover, available evidence suggests that the amount of business restructuring aimed at tax avoidance was relatively modest. A full calculation reveals that the net annual number of new businesses formed in Kansas in 2012 through 2016 has never reached the levels of the three years before the Great Recession.

In other words, the tax “experiment” created precious little — other than gaping deficits.

“Some will continue to argue that Kansas’s fiscal and economic struggles after its tax cuts aren’t relevant to other states, but plenty of evidence says that they are. Other states should be very cautious in pursuing tax cuts in the name of supply-side economics because time and time again we have seen this approach fail,” said Michael Mazerov, author of the report.

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