Why you should care
Because Kansas had other problems, not just larger-than-intended tax cuts.
The author is the founder and president of Americans for Tax Reform.
Kansas cut taxes in 2012 and has since increased them three times — in 2013, 2015 and 2017. The last time was the largest tax hike in the state’s history. To win those tax hikes, Democrats in the Legislature, every spending interest in Kansas and the media blamed all of the Sunflower State’s problems — some pre-existing — on the original tax cut.
The national press has latched onto this food fight, proclaiming that other states should avoid cutting taxes, because “Kansas” proves that tax cuts do not create jobs, but will instead slow economic growth and “savage” education. “Kansas,” we are told, once and for all disproves supply side economics — the idea that lower marginal tax rates on labor and capital will increase work, savings and investment. And, the story goes, if tax cuts don’t spur growth, tax hikes can’t slow growth. The problem? Too much has been extrapolated from a few data points in one state. In the same time period, states like North Carolina, Indiana and Tennessee successfully cut taxes. So what did happen in Kansas?
The drama started when Gov. Sam Brownback was elected in 2010 and noted that Kansas had higher taxes than every neighboring state, except Nebraska. Each year, Kansas was losing residents to states with lower taxes, except Nebraska. Between 1977 and 2004, while the U.S. economy grew 130 percent, the gross state product of Kansas grew only 92 percent. While worker productivity nationwide climbed 38 percent between 1977 and 2004, it only increased 26 percent in Kansas, according to the Bureau of Economic Analysis. So Kansas has been falling behind and losing people for decades.
Those focused on “Kansas” are deliberately not looking at the other 49 states to see whether higher income taxes help or hurt economic growth and job creation.
Brownback proposed reducing income tax rates and eliminating tax preferences to reduce the total tax burden by $352 million between 2013 and 2017. The state Senate was controlled by “moderate” Republicans in league with Democrats, neither of whom favored tax cuts but wanted to be seen as pro-taxpayer ahead of the 2012 election. So the Senate removed the “pay-fors” that offset much of the loss of revenue from income tax rate reductions and increased the net tax reduction 10 times to $3,605 over five years. This was a clever move, but the more conservative House simply passed the larger Senate tax cut, certain they would negotiate down the “cost.” The Senate then refused to work with Brownback or the House, and the larger-than-intended tax cut became law.
While Brownback fought to make the larger tax cut work, the Legislature was unwilling to reduce spending or enact “pay-fors” that would reduce politically driven corporate welfare and subsidies. Over time, the tax and spenders defeated those fighting for lower income tax rates, fewer special interest tax loopholes and less overall spending. That is not new or different; it is the story of Kansas for the past 40 years and the real reason for the state’s slow growth.
But for national advocates of higher spending and taxes, Kansas became a canvas upon which they drew their preferred narrative. A Washington Post headline in September 2014 screamed “Sam Brownback’s ‘experiment’ puts state on path to penury.” The proof? The Post wrote, “Most key indicators suggest that job creation and economic growth in Kansas are lagging those of its neighbors.” True, but, as noted above, that has been true for decades. And, the editorial continued, Kansans fear “cuts to per pupil expenditures in public schools, which have dropped more than 10 percent since 2008.” One notes that 2008 was four years before Brownback’s tax cuts were passed, but the number was wrong anyway: Per-pupil spending, according to Kansas Department of Education data, was $9,707 in 2005 and had jumped to $12,656 in 2012 when the tax cuts were passed; spending increased to $12,776 in 2013 and was $12,960 in 2014. Even after cherry-picking the data, the 10 percent cut was not true.
A particularly important fib was the claim that when the final bill abolished the income tax on small businesses known as “pass-throughs,” the resulting increase in income and employment in small businesses was not due to growth but owing to corporations changing their legal status to take advantage of the change. This falsehood was pushed in a Politico op-ed in 2012 claiming that there were originally only 191,000 such firms, yet 330,000 pass-through exemptions were claimed in 2015. In 2017, the Kansas Policy Institute found that the actual IRS data showed more than 330,000 pass-throughs before and after the exemption was enacted. This was too late for the Kansas debate but stopped this error from interfering with the GOP decision in the Tax Cuts and Jobs Act to reduce the tax rate on pass-through entities that often pay higher taxes than C corporations.
But those focused on “Kansas” are deliberately not looking at the other 49 states to see whether higher income taxes help or hurt economic growth and job creation. This is odd, considering that data is available from the Bureau of Economic Analysis. Consider these private sector comparisons between 1998 and 2016:
- The states without an income tax collectively grew jobs by 40 percent while states in which tax income grew saw job growth of just 21 percent, according to the Kansas Policy Institute’s 2018 Greenbook.
- Wage and salary disbursements grew 120 percent in the states without an income tax; other states grew by 89 percent.
- The states without an income tax had 129 percent growth in GDP compared to 100 percent for the other states.
So do higher taxes slow growth? Between 2007 and 2014, the highest-taxed states grew at 1.3 percent, according to the Heritage Foundation, and the lowest-taxed states grew at 4.8 percent each year.
There is a reason the larger government lobby had to disingenuously cherry-pick Kansas as a test case. Every state provides the same basket of services, but the states that tax income spend 42 percent more per resident than the states without an income tax. States that spend less can pass on the savings in lower taxes, but that means less for those that profit from excessive government spending, which is why the Kansas effort had to be demonized.