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Is the Kansas Tax Cut Experiment Working or Not?
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.
Published in Economics
Because Kansas City straddles the state line of both MO/KS, our local media spends a great deal of time bemoaning the 0verall dismal state of Kansas and its wildly-unpopular Governor.
Where is the money? How will we function? Who will build the roads, pay my pensions, and all that? I have family members who live there and constantly gnash their teeth and fall faint at the mere thought of Sam Brownback and another three years or so in office.
I’ve not heard nor read the info that you have provided. Not surprised though as you will never hear if something is actually working well in KS.
I mean, after all, what’s wrong with Kansas? From my birds-eye view on the other side of the line, they are doing fine.
But ask Amy Schley, her view is within and it might be different since she is living the dream in the Dotte.
“Fiscally, Kansas’s supply-side experiment has been lots of pain with little or no gain.”
Of course. Because in the Liberal’s mind, if it doesn’t work instantaneously, it’s not working at all.
Unless it’s a Liberal policy, in which case it’s already working because, shut up.
Eric Hines
Here we go with the phony tax cut bull. Republicans like talking about tax cuts because they love big government and the issue distracts from this fact. Cut the size of government in any state by a third and don’t touch tax rates and see what happens. The problem is government and government spending. The best thing that could happen is if taxes were set at the rate necessary to actually pay for the bloated government we have instead of passing the bill on to the next generation. It would not belong before the current political establishment and their phony lap dog economists were shot or thrown in jail.
As I understand it, Governor Brownback wanted to eliminate the corporate income tax, which would have made economic sense, but the legislature wouldn’t go for it, so they set the tax rate on pass-through income (income from S-Corps, LLCs, partnerships, etc) to zero.
The (not-so) obvious problem with this scheme is that rather than eliminating the double taxation of a corporate tax, they enacted a system where a lot of taxable income can be avoided. In a pass-through where the owners are also employees, the owners pay themselves wages and salaries, and if there is money left to take out of the business, they pay themselves a dividend. The problem is that these businesses can reduce the (taxable) salaries of their partner-workers and increase the (untaxed) dividends. The owners’ income is the same, but the taxes are much lower than they would otherwise be. That is, they cut taxes a lot more than they thought they were cutting, so it isn’t any wonder that Kansas is running a budget deficit.
If you don’t estimate the change of behavior in response to an incentive accurately, you get budget problems.
I got my first full-time job with benefits in February of 2013. So from my point of view, the Brownback tax policy has coincided with my ability to be a productive citizen.
I do have relatives who are apoplectic about his cuts to school funding. Of course, since that family is a retired teacher father, a retired teacher mother, and two former teacher (now SAHM) daughters, they hold that schools are underfunded as firmly as they believe that Jesus is the Son of God. (Maybe more so, since they’re actively involved in a church that thinks fornication isn’t a sin and being a soldier is.)
Personally, I plan to homeschool anyway, seeing as how even a well-funded Kansas school turned out a ex-boss of mine who doesn’t know how to spell “parade.” And as someone who understands economics, if a job has over 100 applicants for every position — and teacher jobs in the metro area do — the laws of supply and demand suggest that the compensation is too high, not too low.
Brownback’s predecessor took KS spending up to 21% of GDP. Brownback has sucked it down to 15.6% for 2015, and 15.3% for 2016. If that seems like a phony cut to you, then I’m curious about what you’d consider genuine.
He’s also done wonderful things for the state in other ways, with recidivism reduction being the most obvious. Sometimes a great conservative can be a great conservative.