Friday 22 December 2017

What Happened When 1 U.S. State Slashed Taxes to the Bone

The state of Kansas has embarked on what its governor, Sam Brownback, calls a “real live experiment” over the past several years. The experiment, in its simplest terms, was to enact sweeping changes to the state’s tax policy. Lower taxes are typically something to be celebrated, of course. But after witnessing what’s happened in Kansas, many people are rethinking their approach to the tax system, especially given that lawmakers on Capitol Hill, including the president, have tax reform on their agenda in coming months.
The gist of it is Kansas slashed tax rates to the bone. Brownback’s plan was heralded as one of the cleanest and truest economic experiments in recent memory. The problem is real people’s lives were at stake. It wasn’t merely guinea pigs who had nothing to lose. What, exactly, did Kansas do? And how did it all turn out?
We’ll start with the nuts and bolts of the plan itself.

The Kansas plan

In a nutshell, the plan was to lower tax rates considerably and reap economic rewards on the back end. The idea was to allow people and businesses to keep more of their money, rather than giving it to the state government, with hopes that they’d use the money to hire people, invest, or otherwise spur economic activity.
Bold? You bet. Feasible? We’ll find out.
Who is the man behind the plan? What happened after it was enacted and ultimately led to Kansas lawmakers abandoning it? We’ll do an autopsy to try to sum it up. But first, we’ll introduce you to Brownback, the politician who was elected (and subsequently re-elected), promising to make Kansas an economic powerhouse.

Gov. Sam Brownback

The man with the plan, in a very literal sense, is Brownback. Elected to the governorship in 2010 (and re-elected in 2014), Brownback had previously served as a member of the U.S. House of Representatives (elected in 1994) and then as a senator (elected in 1996). He also ran for president in 2008, ultimately losing in the primaries and endorsing John McCain.
Brownback’s ideological stance is where the Kansas experiment is rooted. He’s a fairly hard-line conservative, and because of that he believed he could grow his state’s economy by cutting government red tape and lowering taxes. His failures, as we’ll discuss, have made him one of the most unpopular governors in the country. In fact, for a while, he was the most unpopular, with approval ratings sinking to around 25%. Despite this, he still managed to get re-elected.

The great Kansas tax-cut

Brownback’s plan had really one overarching goal — to slash taxes to the bone. As mentioned, the logic was this would put more money into the pockets of individuals and businesses, spurring economic growth. In 2012, Brownback said his plan would help turn Kansas’ stagnating economy around, creating jobs and attracting investment.
“Our state was losing residents to all surrounding states. We had the highest taxes in the region and ranked among the worst in private-sector job creation. Something had to be done if Kansas was going to be a place where our children and grandchildren could stay to find a job and raise a family,” Brownback wrote in an op-edfor the Wichita Eagle.
“Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy,” he said. “An expanding economy and growing population will directly benefit our schools and local governments.”
His plan was enacted when the legislature lowered the top income tax rate from 6.45% to 4.9%, and for some businesses (partnerships, LLCs, S-corps, and sole proprietorships), the tax rate was cut to zero.

What were Brownback and the GOP’s goals?

As discussed, Kansas Republicans were more or less convinced these tax cuts would result in increased economic activity. From that activity, they would make up for the lost revenue from the tax cuts themselves. They thought businesses would pick up and move to Kansas, investing in local communities and hiring Kansans left and right.
Because Brownback and company believed they would make up for lost ground in terms of revenue, they didn’t pair their tax cuts with spending reductions. Even though many programs now had no funding, it was assumed the influx of revenue would allow the state to break even or perhaps come out ahead.
So what actually happened? We can boil it down to a few key things.

The results: Slow economic growth

First and foremost, Brownback’s plan didn’t produce the promised economic benefits. Though the state’s economy has grown, it’s been outperformed by neighboring states. In fact, studies show the tax cuts — for businesses, specifically — have had very little impact at all. The main reason is those who are benefiting from the tax cuts aren’t reinvesting that money as hoped. Not only that, but some are taking advantage of the systemby reclassifying themselves to jump into different tax brackets.
Researchers at Indiana University and the University of South Carolina said responses to the new tax policies “were overwhelmingly tax avoidance rather than real supply side responses.” In other words, the plan backfired, and Brownback’s job creation and economic growth goals fell way short. But that’s not all.

Ballooning deficits and big cutbacks

Because lost tax revenue wasn’t offset by expected economic growth, many of Kansas’ public programs are facing massive deficits. You might have even heard about how some public schools have had to shut down because they have no funding. But that’s just one part of the problem. The state also had to enact huge cutbacks to infrastructure projects, the court system, welfare programs, and even Medicaid. This all results in Joe Sixpack taking a shot to the proverbial jugular.

Average people didn’t reap the rewards

What we’ve witnessed is things got worse for the average middle-class Kansan. Cuts to public programs and public assistance have impacted families state-wide, and the promise of jobs has fallen flat. Many people actually lost their jobs, too. As cuts to education forced downsizing at some schools in rural communities, teachers have been laid off. In towns where the school is the biggest employer, this has had devastating effects. In poor, rural cities, the cuts to public assistance and lost jobs have amounted to a one-two combination that has set communities even further back.
Some would argue Brownback and Republicans in the state legislature should have seen this coming. But is that fair? What, exactly, went wrong in Kansas?

What went wrong?

Democrats around the country would say the GOP’s plan was doomed from the beginning. They might point to flawed logic and wishful thinking as to what wrecked Kansas’ economy, and that might be a part of it. But what we can say for sure is the tax cuts failed, at least partially, because they weren’t paired with reductions in government spending. This is where the wishful thinking comes in — evidently, it’s a bad idea to shut off revenue streams but still expect to be able to pay your bills.
One Kansas Republican legislator broke down their take on the failed plan on Reddit. The individual’s main points were the state cut too much too fast, relied on wishful thinking for national economic growth, and didn’t include incentives for businesses to create jobs.
Clearly, there are a lot of moving parts, and it’s hard to blame one single part of the plan for the downfall of the entire thing. But we do know Brownback’s plan failed. This has forced legislators to act, and their first order of business was something that’s wildly unpopular.

Kansas lawmakers raise taxes

Yes, the Kansas legislature raised taxes. With nowhere else to turn and growing budget deficits, state lawmakers were really left with no choice. Brownback actually tried to veto the reversal on his tax policies but was overridden. According to the local NPR affiliate KCUR, a $1.2 billion tax increase passed, and exemptions were reversed for more than 300,000 businesses.
The reversal has already generated some optimism. But one Democratic lawmaker said it’ll take quite a while before the damage is fully reversed.
“I think by overriding the governor’s veto that we have started the turnaround,” said state Sen. Laura Kelly of Topeka, according to The Topeka Capital-Journal. “We’re still not out of the woods. It’s going to take years to dig out of the hole that’s been created by the 2012 tax experiment.”

Why should you care? Because this could go nationwide

For those of us who don’t live in Kansas, why should we be concerned? Because the Kansas experiment is something the GOP wants to replicate on a national scale. With President Donald Trump planning on tackling tax reform at some point, you can expect his plans to take a similar shape to that of Brownback’s. In fact, Republicans refer to the Kansas plan as a “road map” of sorts.
The same basic principles apply. The key, though, is to lower taxes significantly for both individuals and businesses. You can bet, too, that Republicans will want to avoid big cuts to public programs (as they did in Kansas) that would be unpopular. Trump, with a Republican-controlled House and Senate, will likely try some form of these cuts sooner or later. Except, in this case, the damage won’t be confined only to Kansas.

Post a Comment

Start typing and press Enter to search