Just as President Trump is ramping up his push for a major tax cut that he believes will pay for itself through faster economic growth, the Kansas template for that approach has crashed and burned. After four years of below-average growth, deepening budget deficits, and steep spending reductions, the GOP-dominated Kansas legislature has repealed many of the tax cuts at the heart of Governor Sam Brownback fiscal agenda.
It is a lesson unlikely to be missed by congressional Republicans—or Democrats.
Brownback vetoed the legislature’s first attempt to reverse his tax cuts, but two-thirds majorities in both the House and Senate overrode his veto. The measure would boost state taxes by $1.2 billion over two years, in part by raising the top income tax rate from 4.6 percent to 5.7 percent and by once again taxing sole proprietorships, partnerships, and other pass-through businesses. Pressured by Brownback, the legislature had made pass-throughs tax free.
A Worrisome Echo
In a worrisome echo of that plan, the Trump Administration says it will propose cutting the federal individual income tax rate on pass-throughs to 15 percent, far below the top current rate on wages of 39.6 percent or Trump’s preferred rate of 35 percent.
Since Kansas enacted tax and spending cuts in 2012 and 2013, Brownback and his allies have argued that this fiscal potion would generate an explosion of economic growth. It didn’t. Overall growth and job creation in Kansas underperformed both the national economy and neighboring states. From January, 2014 (after both tax cuts passed) to April, 2017, Kansas gained only 28,000 net new non-farm jobs. By contrast, Nebraska, an economically similar state with a much smaller labor force, saw a net increase of 35,000 jobs.
The Deficit Explosion
While overall employment barely increased and economic activity was lower than other states, Kansas saw a significant increase in the number of individuals with business income. The likely reason: That zero tax rate on pass-throughs.
The tax cuts did produce one explosion, however. The state’s budget deficit was expected to hit $280 million this year, despite major spending reductions. Kansas falls well below national averages in a wide range of public services from K-12 education to housing to police and fire protection, according to an analysis by the Urban Institute’s State and Local Finance Initiative. Under order from the state Supreme Court, the legislature has voted to increase funding for public schools by $293 million over the next two years.
The more troubling lesson for Republicans in Congress: While Brownback was reelected in 2014, his popularity has since plummeted and his approval rating now hovers at around 25 percent, second lowest among all sitting governors. And while the GOP enjoyed tremendous national electoral success in 2016, the party lost seats in the Kansas legislature. At least in one deep red state, the Trump formula of big tax and spending cuts is no longer the path to political success.
In 2012, Brownback called his tax plan a “real live experiment.” It appears to have failed.
