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So how goes the Great Kansas Supply-Side Tax Cut Experiment? It has been much criticized by liberals and the national media over the past three years. In the new National Review, Henry Olson also argues the growth impact of the tax cuts — the top personal income tax rate was reduced to 4.9% from 6.45% and eliminated for small business owners who file as individuals — has been iffy at best, the deficit impact great: “Fiscally, Kansas’s supply-side experiment has been lots of pain with little or no gain.” (Olsen prefers the more middle-class-centric approach of Governor Scott Walker in Wisconsin.)
But over the weekend, the Wall Street Journal published a note from Andrew Wilson of the St. Louis-based Show-Me Institute that presented a differed take. While Kansas Governor Sam Brownback said the state’s “new pro-growth tax policy” would be “like a shot of adrenaline into the heart of the Kansas economy,” Wilson offers a positive, though subdued, conclusion, “… if Kansas hasn’t exactly catapulted into the front ranks in economic growth and employment, then it has at least moved a long way from the stagnation of recent decades.”
He points out, for instance, that from 1998-2012, “Kansas ranked 38th in private-sector job growth, according to Bureau of Labor Statistics data crunched by the Kansas Policy Institute. In 2013 — the first year after the tax reform — the state climbed to 27th place, and in 2014 it moved to 21st, placing it in the top half of states.” Also: “In the second half of 2014, hourly wages in Kansas grew 3.5%, according to BLS data, far faster than the national average of 1.9%.”
Some good things to do seem to be starting to happen in Kansas. Faster private job growth, faster income growth. But is Kansas’s economic performance really so distinctive overall? What economist Scott Sumner said last summer about Kansas has really stuck with me: “I consider myself a moderate supply-sider, but I certainly wouldn’t expect such a tiny tax cut to significantly affect behavior. And any effects that did occur would happen very gradually, over a period of many years.”
For instance: While its jobless rate fell 1.2 percentage points from March 2013 to March 2015, the national jobless rate fell by 2.0 percentage points. And among its four neighboring states, the jobless rate fell by an average of 1.6 points. And although Kansas’s employment rate — the number of non-military, non-jailed adults with jobs — rose by 0.9 percentage point over that two-year span, it rose by nearly as much, 0.8 percentage point, among its neighbors and America overall. On the other hand, the Kansas labor force participation rate is stable, while the Group of Four has declined, as has the national economy. Of course, momentum could be building as longer-term, supply-side incentives have changed. Maybe the differences will be more dramatic another two or three years on.
Oh, but then there is the deficit issue, which Wilson doesn’t really counter: “Critics contend that Mr. Brownback’s tax cuts have blown a hole in the state budget—$344 million in the 2015 fiscal year and $600 million in the next. The governor is filling those gaps by moving money from highway projects and delaying some public pension contributions. He has also proposed raising cigarette and alcohol taxes and pausing some of the tax cuts still scheduled to take effect.”
So in microcosm, the Kansas experiment tends to reinforce some basic notions about tax cuts: (a) they certainly can be growth positive, (b) supply-side impacts take longer to play out, and (c) they are unlikely to be self-financing. So cut with caution and purpose. Watch the budget. And keep expectations modest over the near term.