Government & Politics

Kansas tax ‘experiment’ offers lessons to the nation, analysts say

Less than five years into its “march to zero,” Kansas has retreated from Gov. Sam Brownback’s tax cuts, and policy analysts say the nation would be wise to learn from the state’s battle scars.

Kansas lawmakers overrode Brownback’s veto Tuesday night, effectively ending the tax cuts the governor had promised would be a “shot of adrenaline” to the Kansas economy. It stands as Brownback’s biggest defeat during his tenure as governor.

The bipartisan rejection of the policy, only four and half years after the tax cuts took effect, will likely be used as a hammer against President Donald Trump as he pushes for similar tax cuts at the national level. Brownback will meet with Trump Thursday as part of a White House summit on infrastructure projects.

“A lot of people made it about me, but it’s not about me,” Brownback told reporters Wednesday morning. “It’s about Kansas. It’s about the future of this state. It’s about which way do we want to go. Do we want to be a high-tax, slow-growth or no-growth state? Or a pro-growth state?”

At Brownback’s urging, Kansas eliminated state income tax for the owners of pass-through businesses, eliminated its top tax bracket and cut rates across the board. The policy, which Brownback called a “real live experiment,” took effect in January 2013.

During his re-election campaign, Brownback claimed that the policy would help Kansas gain 100,000 private sector jobs in four years, and he compared analysts warning that the state was headed to a budget crash to Chicken Little.

“The sky did fall,” said Duane Goossen, the state’s former budget director who served under the three governors who preceded Brownback.

A week after Brownback won re-election in November 2014, his budget director announced that the state was facing a massive budget hole. Kansas has struggled to find stable financial footing despite a series of budget cuts and a sales tax hike in 2015.

Job growth has also fallen far short of Brownback’s promises.

Kansas has gained 14,200 private sector jobs since Brownback started his second term in January 2015, according to the Kansas Department of Labor, compared to the governor’s campaign promise to add 25,000 jobs a year.

Kansas was one of only four states to lose private sector jobs between April 2016 and April 2017, with a growth rate of -0.53 percent, compared to the national growth rate of 1.6 percent for that period, according to an analysis by Arizona State University’s Seidman Research Institute.

“He really staked his entire reputation on this one thing, which I actually think is fairly unusual if you look at governors,” said Patrick Miller, a political scientist at the University of Kansas. “Most governors don’t stake their entire reputation on one piece of legislation … and it really blew up in his face.”

The bill passed by the Legislature this week puts roughly 330,000 owners of pass-through businesses, including law firms, family farms and real estate companies, back on the tax rolls. It restores the third bracket and raises rates — though to a level lower than what the state had before Brownback’s cuts — to generate $1.2 billion over two years to close the state’s budget hole and pay for a court-ordered school funding increase.

National Democrats and left-leaning groups seized on the reversal of Brownback’s trademark achievement as evidence that those policies would fail at the national level.

“The Trump-Ryan plan for America is not a theoretical exercise,” tweeted Dan Pfieffer, a former senior adviser to former President Barack Obama. “It was tried in Kansas and it failed spectacularly.”

Chuck Marr, the director of federal tax policy for the Center on Budget Policy and Priorities, a left-leaning think tank based in Washington, called the Kansas tax “such a high-profile example” of the supply-side economic theory that it’s “going to undercut their argument going forward.”

Arthur Laffer, the economist who elevated supply-side policies during the Reagan years, consulted with Brownback in 2012 when he pushed tax cuts to stimulate the Kansas economy. Laffer said Wednesday that he would have preferred to reduce pass-through taxes rather than wiping them out.

Still, he defended the policy as “a plus for the state” and predicted that its repeal would be a bust for Kansas.

“If Kansas thinks it can tax itself to prosperity, it can go ahead and do that,” Laffer said. “I don’t think it will work.”

Senate Minority Leader Anthony Hensley, a Topeka Democrat, said that Kansas should have never paid Laffer $75,000 for his advice on tax policy and that other states should learn a lesson from Kansas.

Brownback entered office with a strong mandate for his anti-tax agenda in 2011 after winning his first race for governor by 31 percentage points. Six years later, the governor has seen his political clout severely diminished after the state burned through its cash reserves.

“He turned a billion-dollar surplus into a billion-dollar deficit. And that’s what’s extraordinary,” said Hensley, the longest-serving member of the Legislature.

“He had an opportunity to do some amazing things … and yet he squandered it on a misguided, horrible tax policy. That’s what’s so extraordinary about this,” Hensley said. “Yeah, he had a mandate when he came to office, but he used that mandate to destroy state government and to destroy his own political career.”

Goossen said Kansas provides a simple lesson for other states considering tax cuts: You’ve got to have enough money to pay your bill.

“This is a major lesson certainly for other states but also for Congress because what Trump has proposed is kind of the Brownback tax plan on steroids … and we’re going to get the same result out of that,” he said. “Congress, the rest of the United States ought to look carefully at what happened to us.”

Martin Hamburger, a Washington-based Democratic political consultant, said the Kansas example could alter any tax cut bill put forward by the Trump administration or the GOP in Congress.

“In the basement of the Capitol building where Republican policy nerds are grinding out the tax plan are going ... ‘Did you see what happened in Kansas? We better change what we’re doing,’ ” he said. “They saw that this toxic combination failed.”

It would be hard, for instance, for members of the Kansas congressional delegation to vote for a tax plan that looks too similar to the policies Brownback put in place, Hamburger said.

“How could you vote for a massive tax cut for the rich and massive cuts in spending,” he said, “if you’ve just seen this fail in your own state?”

U.S. Rep. Lynn Jenkins, a Topeka Republican, sits on the committee reviewing Trump’s proposed tax cuts in the U.S. House.

Jenkins’ office disputed the notion that Trump’s plan and Brownback’s plan are comparable. Her office said by email that Congress is looking to bring down the rate on pass-through business owners from 39.6 percent to 25 percent “and to have that fully ‘paid for’ with corresponding offsets and base broadening. Instead of 25%, the Kansas plan went to 0% for pass-throughs without offsets and saw deep tax cuts elsewhere.”

Goossen countered that any time there’s a difference “between what the pass-through people pay and the paycheck people pay” it encourages tax avoidance.

Joseph Henchman, the vice president of the Tax Foundation, a Washington, D.C.-based think tank that advocates for tax reform, said Kansas does provide lessons but he cautioned against using the state as an example to judge all tax cuts.

He said Kansas failed to couple spending cuts with its tax changes and narrowed its tax base by eliminating income tax for pass-through business owners rather than broadening its tax base the way states such as North Carolina and Indiana have done.

“Most tax cuts don’t pay for themselves, so if you support tax cuts because they create economic growth…you need to make hard decisions about broadening the tax base or cutting spending,” Henchman said. “There are groups out there that oppose tax cuts of any kind and they will hold up Kansas as their proof that any tax cut causes the end of the world. I should add inaccurately.”

Ken Kriz, an economist at Wichita State University who has studied the tax cuts, said the events in Kansas “should be another nail in this coffin in this Pollyanna story that the only thing we need to do is cut taxes and everything will be wonderful.”

Tax cuts can have positive economic benefits, Kriz said, but no serious economist believes they ever pay for themselves.

Debate over Brownback’s tax policies promises to continue to dominate Kansas politics through 2018 when the state elects a new governor and House members who voted for the tax increase stand for re-election.

“Kansans do not want their income taxes increased. It is time to drain the swamp in Topeka,” Kansas Secretary of State Kris Kobach, who is contemplating a run for governor, tweeted Wednesday morning.

Some Kansans actually ended up paying more in taxes overall under Brownback because deductions were eliminated and other taxes were raised to pay for Brownback’s tax cuts.

Former Rep. Mark Hutton, a Wichita Republican who emerged as a vocal critic of the pass-through exemption, said that “instead of a Reaganesque tax cut it turned out to be a tax shift. ... And we couldn’t shift enough. They ran out of places to go.”

An analysis by the Institute on Taxation and Economic Policy found in 2015 that taxpayers in the bottom 40 percent saw an overall increase in their taxes under Brownback when the 2015 sales tax increase is included.

Hutton compared Brownback’s approach to tax policy to recklessly driving a motor boat.

“If you’re zooming down the lake at 30 to 40 miles an hour and all of a sudden you make a hard right turn, there are some people who are going to fly out of the boat,” he said.

Brownback repeatedly resisted calls from conservative lawmakers to pursue deeper spending cuts and relied primarily on one-time fixes to patch the state’s budget in recent years.

However, his former chief of staff and closest political confidante, David Kensinger, blamed the end of Brownback’s signature policy on the fact that the tax cuts weren’t paid for by spending cuts.

“It shows if you want to do significant tax relief, you have to be really disciplined on the spending side,” said Kensinger, who works as a lobbyist but continues to run the governor’s political organization.

Kensinger said Wednesday that moving policy levers in Topeka could only do so much to steer a state economy that’s determined much more by national and global factors — the sort of things that depressed demand for aerospace, oil, gas and farm commodities.

“The experiment was always too small to answer the question,” Kensinger said. “The fiscal tools you have as a Kansas policy maker are a lot smaller than what you have at the world level.”

He said the failure of state tax revenue projections to match up with reality, month after month, built a narrative that the Brownback tax cuts weren’t working. That eroded political support and ultimately doomed them, Kensinger said.

“It didn’t have enough time,” he said.

Hunter Woodall of The Kansas City Star contributed to this report.

Bryan Lowry: 816-234-4077, @BryanLowry3

Scott Canon: 816-234-4754, @ScottCanon

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