The tax bill that was recently passed through Congress and signed by President Trump has many of the same elements as the 2012 tax cut experiment in Kansas. Instead of supercharging economic growth in the state, their tax experiment led to sluggish growth, massive budget deficits, and deep cuts to critical government services, especially schools. The tax cuts were such a failure that in 2016, the Kansas legislature voted to cancel the experiment and raise taxes, a major defeat for the Tea Party Republicans who had championed the tax cuts.
This is what happened in Kansas:
In 2012, Governor Brownback (R) had a legislature full of Tea Party Republicans and passed a big tax cut bill. He reduced the tax rates for most individuals and eliminated taxes on pass-through businesses. Pass-throughs are the small businesses like sole proprietorships, partnerships and S corporations (LLCs and LLPs).
Brownback swore that the tax cuts would pay for themselves through supercharged growth. He claimed that Kansas would not create budget deficits or require painful cuts to government services. Brownback argued that the tax cuts would create more than 22,000 jobs over the next 5 years. Essentially, Kansas was going to become the land of milk and honey.
Brownback’s estimates were wrong. Not a little bit wrong, but completely off the mark. The state’s revenues shrank immediately, and Kansas’ economy grew more slowly than in neighboring states and the country as a whole. The state’s bond rating plummeted.
Unsurprisingly, overall growth and job creation dramatically underperformed the national economy and the economies of Kansas’s saner neighbors. The tax cut was proving to be disastrous.
Decreased tax revenues created a massive budget deficit. Unlike the federal government, the Kansas state government has to balance its budget. This forced the legislature to make major cuts in spending. They slashed K-12 education, university budgets, housing, police and fire protection, and infrastructure projects. State lawmakers tried to balance the budget by tapping into reserves and the highway fund. Then, they reduced pension contributions and cut Medicaid.
One of the reasons revenue dropped so much was that some business owners restructured their companies to take advantage of a pass-through loophole. The calls to raise tax rates again grew louder but instead Brownback had the legislature pass a temporary sales tax and then added taxes on cigarettes and alcohol.
But after four years of bad growth, growing deficits, and painful spending reductions, the GOP-dominated Kansas legislature repealed Brownback’s tax cuts, putting an end to the experiment.
Back to our current situation:
On January 1, Trump and the GOP-led Congress’ new tax plan went into effect. The plan lowers taxes for the top earners, cuts taxes for large businesses, and lowers the tax rate for pass-throughs. Just like Brownback did, Trump’s team is promising that explosive growth will make up for the cost of their cuts. Treasury Secretary Steven Mnuchin claimed that “Not only will this tax plan pay for itself, but it will pay down debt.”
Speaker Paul Ryan argued on Fox and Friends that the primary motivation for the tax was not an effort to reward the Republican donor class but to create “a tax code to get economic growth.” Speaker Ryan even went so far as to make projections regarding the number of jobs that would be created. This is the chart he shared:
Remember, Kansas came nowhere near to hitting their job projections.
One person who is a huge fan of Congress’ new tax plan is Arthur Laffer. Laffer is the creator of the dubious Laffer curve and noted supply-side economist who advised President Reagan, and yes, helped create the Kansas tax plan.
Since the Kansas legislature raised taxes and overrode Sam Brownback’s veto, the Kansas-based Koch Bros have continued to attack state legislators for raising taxes again and have been lobbying Congress aggressively for these tax cuts.
Perhaps, though, we should heed the warnings from Kansas legislators who are in the middle of having to clean up this mess. Regarding the “it pays for itself” promise: “That won’t work, so you better learn our lesson,” warned Kansas state Senator Barbara Bollier (R).
“It was supposed to increase the GDP, and it didn’t. The feds will have that same problem,” said state Senator Jim Denning, a conservative who originally supported the tax cuts. “This is designed to shrink government. It is not designed to grow business,” state Representative Stephanie Clayton said.
The Kansas Tax Cut was a complete failure. Kansas Republicans were forced to repeal the tax cuts to save Kansas. Brownback became one of the least popular governors in America and was rejected and overruled by the Kansas legislature. Soon thereafter, Brownback decided to bail, and resigned as governor to take a thankless ambassador-at-large position in the Trump administration.
It remains to be seen what effects Congress’ new tax plan will have on America. Looking at the results in Kansas isn’t encouraging.