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A Kansas Wake-Up Call for Other States Considering Big Income Tax Cuts

February 23, 2017 at 4:30 PM

Bipartisan coalitions in both legislative houses in Kansas voted to reverse enormous tax cuts that Governor Sam Brownback and others touted as a model for other states and the nation. Although the state Senate fell just short yesterday of the two-thirds vote to override Gov. Brownback’s veto, the majority votes in both houses reflect several years of evidence that the tax cuts failed to produce strong economic growth and should serve as a wake-up call to states that are considering (or recently enacted) deep income tax cuts.

Five years ago, Kansas slashed income tax rates, eliminated income taxes entirely for many businesses, and enacted further income tax rate cuts to phase in several years into the future, aiming eventually to eliminate the income tax. Gov. Brownback called his efforts a “red state model” and claimed the tax cuts would act “like a shot of adrenaline into the heart of the Kansas economy.”

Rather than generate an economic boom, however, 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. Meanwhile, job growth has lagged far behind job growth nationally, and the hoped-for economic boom shows no signs of materializing (see graph).

 

Facing growing public pressure to undo the tax cuts, state lawmakers approved a bill last week reversing most of them — raising the top income tax rate, repealing the business tax exemption, and eliminating the additional, future rate cuts. After the governor vetoed the rollback, the Kansas House voted to override his veto on a 85-40 vote, including 45 Republicans. Later in the day, the Senate also voted to override, but its 24-16 vote came up three votes short.

The next steps are unclear. The governor’s budget proposal, released earlier this year, tries to paper over the problem by securitizing the state’s tobacco settlement fund, diverting money from the state’s highway fund, neglecting payments into the retirement fund for state workers, imposing more budget cuts, and raising alcohol and cigarette taxes. That plan has little to no support in the legislature. Meanwhile, revenues remain hundreds of millions of dollars short of paying for services provided this year, and they’re projected to fall even further behind next year.

As Kansas lawmakers have learned from direct experience, policymakers in other states should understand that these sorts of tax cuts typically force cuts in funding for investments that people and businesses in states need to thrive, and they can jeopardize a state’s fiscal health.


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