Steve Rose

Arthur Laffer’s view on the Kansas economy: Prosperity awaits patient tax cutters

Economist Arthur Laffer spoke to a small business forum in 2012 at Johnson County Community College.
Economist Arthur Laffer spoke to a small business forum in 2012 at Johnson County Community College. The Kansas City Star

Celebrity economist Arthur Laffer told me in an interview last week that he was not surprised by the huge deficits Kansas is facing because of massive tax cuts.

Back in August 2012, Laffer told a crowd at the Johnson County Community College, if Kansas would slash its income tax rates, it would result in “enormous prosperity.”

He told a reporter at the time that he had not produced an economic model on when Kansas will notice meaningful economic growth.

Two-and-a-half years later, Kansas is staring at a budget crisis, with more than a billion dollar gap between revenues and expenses projected in the current and next budget years. The state is also experiencing a low private job growth rate, as well as a slow-growing economy.

In a 45-minute phone interview, Laffer said while he is “not surprised,” he didn’t know why the deficits have occurred. He still believes adamantly in his supply-side economic theory: If you reduce income taxes, you will raise more revenue, not less.

Just when the revenue starts to rise is another matter.

“You have to view this over 10 years,” Laffer said. “It will work in Kansas.”

The economist clearly did not see the massive tax cuts in Kansas as an “experiment,” as described by Kansas Gov. Sam Brownback. Rather, he viewed the positive outcome in Kansas from tax slashing as a certainty.

“It may be a problem in the short term,” he said. But he said the governor and Legislature “did the right thing” by cutting income taxes.

The 74-year-old former economist for President Ronald Reagan, who remains controversial among mainstream economists, was paid $75,000 to consult with Brownback and his staff before the tax-cut legislation passed in 2012. Some say Laffer was the inspiration for the Kansas tax-cut plan, if not its architect.

He has stayed in touch with Brownback. Laffer told me the two talked just before the November election.

Laffer did not know at the time of our conversation that Brownback might make some notable compromises to his pledge not to increase other taxes, as well as his previous commitment to continue tax cuts through 2018.

Apparently, both may be on the table.

Some critics are even clamoring for Brownback to rescind the tax cuts.

“If you reverse course, it is a very bad thing,” Laffer said. “I feel sorry for the governor, but he did the right thing.”

Laffer, who holds a Ph.D from Yale, has intensely studied the nine states that have no income tax, and he has concluded growth is higher in those states than other states, explicitly because of the low tax environments. Those findings are disputed by many economists, who maintain those no-income tax states have offsetting revenue sources, such as oil, tourism, gambling, taxes on natural resources, higher sales taxes or higher property taxes.

Laffer is clearly brilliant and has an encyclopedic mind. He can site chapter and verse on virtually every economic comparison among each of the 50 states.

Out of the 45 minutes we chatted, I could barely get the economist to focus on the Kansas dilemma. Rather, Laffer preferred to talk about how tax cuts have worked everywhere, always.

With a breathtaking exuberance Laffer took me on a telephonic economic tour of America, again and again making the case that lower tax states always grow more than other states.

At his own suggestion, he overnighted to me a copy of his recently released book, “An Inquiry into the Nature and Causes of the Wealth of States.”

It states: “Low-tax states in every region of the country are outperforming their neighbors.” So far, in the early stages of the Kansas tax cuts, the state is trailing its neighbors. But it may be too early to know the ultimate effect.

In a typed note inside, the renowned economist urged me to call him anytime.

How can I resist? Laffer’s openness and off-the-charts enthusiasm can be captivating.

And yet lots of questions are left unanswered.

To reach Steve Rose, longtime Johnson County columnist, send email to srose@kc.rr.com.

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