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GOP Tax Plans Would Emulate Failed Kansas Experiment

April 21, 2017

Massive tax cuts Kansas enacted in 2012 were among the largest ever adopted by a state, and delivered lopsided benefits to the wealthy. Key architects of Kansas’ tax cuts, including Governor Sam Brownback and long-time tax cut advocates Stephen Moore and Art Laffer, are urging federal lawmakers to mimic Kansas’ plan.

But the Kansas tax cuts are a cautionary tale, not a model: promises of immediate economic improvement failed to materialize; revenues plummeted, causing cuts to services, delays to road projects, and underfunded schools; and proponents used inaccurate and misleading economic data to defend poor outcomes.[1]

President Trump’s campaign tax plan (which Moore and Laffer helped design) and the House GOP “Better Way” tax plan adopt key elements of the Kansas plan: large income tax rate cuts, and a special, even lower tax rate for “pass-through” business income.[2] Art Laffer says Trump’s plan will generate economic “nirvana,” with economic benefits that will “trickle down” to ordinary workers. The results of the Kansas tax-cut experiment show that these claims are dubious.

Proponents Promised Massive Tax Cuts Would Deliver Economic Boom

In advocating for the Kansas tax-cut package, which tilted heavily towards the wealthy, Gov. Brownback claimed the Kansas tax cuts would act “like a shot of adrenaline into the heart of the Kansas economy.” Laffer and Moore predicted that the cuts would have a “near immediate” positive effect on the state’s economy.

The tax package slashed individual tax rates and eliminated taxes on “pass-through” business income, that is, income from businesses such as partnerships, S corporations, and sole proprietorships that is currently taxed at the same rates as income from wages and salaries. Pass-through income is heavily concentrated among wealthy investors. Analysts across the political spectrum flagged the risk that the pass-through rate cut would create an incentive for high-income earners (such as lawyers, accountants, and other professionals) to claim more of their income as “business income” in order to get the lower rate.

What Happened in Kansas

The promised boom failed to materialize; Kansas’ infrastructure, schools, and bond rating suffered; and a bipartisan coalition tried to reverse the tax cuts.

  • Since the tax cuts took effect in January 2013, Kansas has lagged the nation in total private employment growth, economic growth, and small business formation (see chart). 

     

  • The tax cuts wreaked havoc on Kansas’ ability to invest in its people and infrastructure. To balance its budget, the state employed gimmicks and one-time revenue, delayed road projects, cut services, and nearly drained funds it had set aside to prepare for the next recession. Two bond rating agencies downgraded Kansas due to its budget problems.
  • The Kansas Supreme Court has ruled that state funding for K-12 education is inadequate and set a June 30 deadline for lawmakers to raise revenue for schools. Kansas’ cuts in school funding since the Great Recession are among the nation’s deepest, with the tax cuts making it hard to restore school funding.
  • Bipartisan coalitions in both legislative houses in Kansas voted to reverse the tax cuts. The Kansas Senate fell just short of the two-thirds vote to override Gov. Brownback’s veto.

Defenders Relied on Inaccurate and Misleading Economic Data

In the face of these results, proponents of the tax cuts have used misleading data — or stopped reporting data that didn’t support their claims — in continuing to defend the cuts.

  • Stephen Moore wrote a 2014 Kansas City Star op-ed defending the tax cuts, but used incorrect data, Star columnist’s Yael T. Abouhalkah’s follow-up reporting revealed. Moore and Laffer argued in a 2016 Star op-ed that the tax cuts generated an economic boost and was “sweet supply side revenge for tax cutters in Kansas” against their critics, but Abouhalkah found the claim rests on a highly selective and misleading citation of unemployment and job creation data.
  • In 2016, Gov. Brownback and other officials stopped producing a quarterly “Kansas-specific review of economic markers picked by the administration and championed as an accountability test of its economic vision.”[3]

GOP Federal Plans Head Down Same Path

GOP tax plans have adopted key elements from Kansas’ tax cut plan:

  • The Trump campaign tax plan and the House GOP tax plan would both cut the top individual income tax rate to 33 percent and, in a version of the Kansas pass-through exemption, would cut the top rate on pass-through income from 39.6 percent rate to 15 percent and 25 percent, respectively.
  • Trump’s proposed pass-through rate cut would cost $1.5 trillion over ten years, accounting for about one-fourth of his campaign tax plan’s total cost, the Tax Policy Center estimates, and $600 billion of the cost of the Trump pass-through proposal reflects revenue lost due to tax avoidance by high earners.

These provisions are among the reasons why, like the Kansas plan, the Trump and House GOP plans are costly and overwhelmingly benefit those at the top. More than 50 percent of the Trump plan's net tax cuts would go to millionaires, and more than 99 percent of the House GOP plan would. Trump’s plan costs $6.2 trillion in the first decade, and the House GOP’s costs $3.1 trillion.

The federal government doesn’t have to balance its budget like Kansas does, but both the Trump Administration and House GOP leadership have adopted budget frameworks and policy proposals that would pair their tax cuts with large cuts to domestic investments.[4]

These plans are also being touted with promises of economic growth, with House Speaker Paul Ryan saying “if you want faster economic growth, more upward mobility, and faster job creation, lower tax rates across the board is the key — it’s the secret sauce."[5] Trump has claimed his plan would pay for a large share of itself with through increased growth, relying on rosy assumptions and economic models far outside the mainstream.

But there’s ample evidence that large federal tax cuts for the wealthy are a poor way to secure growth.[6] The Kansas experience is another reason for skepticism.

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End Notes

[1] Michael Leachman, “A Kansas Wake-Up Call for Other States Considering Big Income Tax Cuts,” Center on Budget and Policy Priorities (CBPP), February 23, 2017, http://www.cbpp.org/blog/a-kansas-wake-up-call-for-other-states-considering-big-income-tax-cuts and Michael Mazerov, “Kansas’ Tax Cut Experience Refutes Economic Growth Predictions of Trump Tax Advisors,” CBPP, updated August 12, 2016, http://www.cbpp.org/research/federal-tax/kansas-tax-cut-experience-refutes-economic-growth-predictions-of-trump-tax.

[2] “Pass-Through Tax Break for the Wealthiest,” CBPP, April 5, 2017, http://www.cbpp.org/research/federal-tax/pass-through-tax-break-for-the-wealthiest.

[3] Tim Carpenter, “Gov. Sam Brownback, advisers abandon report of Kansas economy,” Topeka Capital-Journal, September 24, 2016, http://cjonline.com/news-legislature-local-state/2016-09-24/gov-sam-brownback-advisers-abandon-report-kansas-economy.

[4] Sharon Parrott, David Reich, and Isaac Shapiro, “Trump Skinny Budget Will Be Short on Details, But Troubling Fiscal Agenda Is Emerging,” CBPP, March 15, 2017, http://www.cbpp.org/research/federal-budget/trump-skinny-budget-will-be-short-on-details-but-troubling-fiscal-agenda-is, and “House Budget Roundup 2016: Everything You Need to Know About the House Budget Plan,” CBPP, April 7, 2016, http://www.cbpp.org/blog/house-budget-roundup-2016-everything-you-need-to-know-about-the-house-budget-plan.

[5] Matthew Yglesias, “Paul Ryan says tax cuts for the rich are ‘even more pressing now,’” Vox, August 21, 2014, http://www.vox.com/2014/8/21/6052625/paul-ryan-vs-mike-lee.

[6] “Tax Cuts for the Rich Aren’t an Economic Panacea — and Could Hurt Growth,” CBPP, April 13, 2017, http://www.cbpp.org/research/federal-tax/tax-cuts-for-the-rich-arent-an-economic-panacea-and-could-hurt-growth and Chad Stone and Chye-Ching Huang, “Trump Campaign’s ‘Dynamic Scoring’ of Revised Tax Plan Should Be Taken With More Than a Grain of Salt,” CBPP, September 15, 2016, http://www.cbpp.org/research/federal-tax/trump-campaigns-dynamic-scoring-of-revised-tax-plan-should-be-taken-with-more.