The Republican-controlled Kansas state legislature’s repudiation of Gov. Sam Brownback’s economic policies this week should provide a cautionary tale to the Trump administration and Republican Congress of the risks in pushing supply-side tax cuts.
For years, Brownback’s unflinching fealty to across the board tax cuts and related austerity policies have driven Kansas’ economy into the ground, fostered historic budget deficits, and forced deep cuts in the school system and other vital government services.
Brownback, a staunch conservative Republican, and disciple of Reagan-era style tax cuts pioneered by economist Arthur Laffer fended off critics by blaming the state’s diminished fortunes on global economic forces, declining grain prices and excessive government spending. His supporters stood by him while state officials drained the state’s cash reserves, diverted money from road construction and depleted the state’s employee pension fund.
But in the wake of a recent state Supreme Court ruling that the government had illegally underfunded the school system, his Republican allies in the legislature finally lost patience this week and voted to repeal part of Brownback’s 2012 tax cuts to raise $1.2 billion over the coming two years.
Brownback in February vetoed another effort to raise taxes to address the crisis and made it stick. But late Tuesday night, the state Senate and House, both controlled by the GOP, voted hours apart to override the governor’s veto and enact the emergency legislation largely aimed at bolstering school funding.
“I think we’ve been pushed to the brink,” state Rep. Dan Hawkins, a Wichita Republican, told the Kansas City Star. State Sen. Randall Hardy, a Republican from Salina, said, “I think we’re going to stop the hemorrhaging.”
Brownback’s political reversal of fortune comes at a time when President Trump and the GOP-controlled Congress are contemplating major tax cuts for individuals and corporations designed to spur investment and create jobs and essentially pay for themselves over the coming decade through unprecedented growth in government revenues.
Trump’s fiscal 2018 budget blueprint anticipates three-percent annual economic growth in the coming years -- generated by major tax cuts -- that would flood the government coffers with added revenue. That is a rosy scenario contradicted by forecasts of 1.9 percent Gross Domestic Product growth in the out years by the Congressional Budget Office (CBO) and other analysts.
Although the administration so far has provided only a one-page summary of its tax reform plan that mirrors many of Trump’s campaign promises, the Committee for a Responsible Federal Budget prepared a cost estimate of the president’s latest ideas and concluded they could result in $5.5 trillion of lost revenue during the first decade.
The spending watchdog group warned that Trump’s tax plan if implemented could push the gross national debt to 111 percent of GDP by 2027, higher than any time in U.S. history.
Runaway deficits and debt might force the government to roll back part of the tax cut – as the Kansas Republican legislators just voted to do– or make much deeper cuts in spending. Trump’s budget currently calls for major increases in spending on defense and homeland security, but $4.3 trillion of cuts in domestic discretionary and mandatory spending over 10 years to tame the deficit.
The combination of declining revenues, rising deficits and vastly diminished government services and projects could prove lethal to the economy in the coming decade, critics warn.
Bill Hoagland, senior vice president of the Bipartisan Policy Center and a former Senate Republican budget expert, said Brownback’s tax cut strategy, “didn’t translate into the growth they wanted out there and didn’t translate into the services they wanted. Even in a solidly Republican state like Kansas, there is a sense that there is a role for government and we should pay for those services. If that means increased taxes, so be it.”
William G. Gale, co-director of the left-leaning Urban-Brookings Tax Policy Center, said, “This is as close to a controlled experiment as we’re going to get in tax policy. Kansas cut taxes, they eliminated the business income tax, and they ended up growing more slowly than surrounding states. And then they have to cut needed services.”
But Brownback sees things much differently. Dismayed by the override, the governor lamented that “We’ve made a big step backward” that will kill jobs and economic growth with higher taxes. “I think it’s the wrong philosophy to implement,” he told reporters.
Brownback pushed a major tax system overhaul through the state legislature in 2012. That plan included a 25 percent reduction in the top income tax rate and elimination of taxes on various types of income such as non-wage small business income. But far from proving to be an economic elixir, Brownback’s experiment caused a steep drop in state revenues and a sagging job market.
As other states began to recover from the recession in 2014, Kansas’s historic tax cut left schools and other public services mired in the recession, and declining further, according to an analysis at the time by the Center on Budget and Policy Priorities.
That year, Kansas residents and businesses paid $700 million less in state taxes than the previous fiscal year. The decline in revenue was exacerbated by Brownback’s decision to cut the state business tax to zero, which created a five-to-seven-point differential between the state tax on regular income and business income.
That change opened the gate to major tax avoidance, Gale said, as many Kansans found ways to re-label personal income as business income to escape taxes. Trump’s tax proposal would have a similar dynamic, Gale says, with a 15 percent business tax compared with a 33 percent top individual rate.
Since Brownback first passed his tax cut – the biggest in Kansas history – the state’s economic growth has regularly lagged behind the rest of the country, according to a Washington Post analysis. Last year, for example, the state’s GDP increased a mere 0.2 percent, compared with a growth rate of 1.6 percent nationwide. By the end of 2015, Kansas technically was in recession, following two consecutive quarters of shrinking GDP growth.