Kansas Gov. Sam Brownback and his state legislature have embarked on a wonderful natural experiment. Once again we are testing the question: Can tax cuts pay for themselves? The answer– yet again– is a resounding no.
We’ve tried this experiment time and again. And tax cut proponents such as economist Art Laffer continue to insist they can turn fiscal dross to gold: Cut taxes deeply enough and the resultant boom in economic activity will boost revenues. Magic. Painless. Everything a politician would ever want.
Except this is fiscal snake oil. Over the past few years, Brownback and the Kansas legislature have gone all-in on this theory. The good news: They have left little room for ambiguity (though Brownback and his defenders are scrambling to find some, given the dismal results of their ambitious experiment).
The tax cuts in Kansas have been breathtaking. In 2012, at Brownback’s urging, the legislature cut individual tax rates by 25 percent and repealed the tax on sole proprietorships and other “pass-through” businesses. It also increased the standard deduction (though it eliminated some individual credits as well).
In 2013, the legislature cut taxes again. It passed a measure to gradually lower rates even more over five years. By 2018, the top rate, which was 6.45 percent in 2012, will fall to 3.9 percent. It also partially restored some of the credits it eliminated in 2012. This time, it did raise some offsetting revenue for the first few years but far less than the statutory tax cuts. The Center on Budget & Policy Priorities wrote up a nice summary of all the tax changes.
So what happened after all those tax cuts? Revenues collapsed.
From June, 2013 to June, 2014, all Kansas tax revenue plunged by 11 percent. Individual income taxes fell from $2.9 billion to $2.2 billion and all income tax collections plummeted from $3.3 billion to $2.6 billion, a drop of more than 20 percent.
A big chunk of that revenue decline likely comes from individuals redefining themselves as pass-through businesses. Last month alone the state’s individual tax payments fell by one-third from June, 2013.
Keep in mind that these are actual year-over-year declines in revenues, not shortfalls in projected revenue. And they came at a time when the national economy was recovering (albeit slowly) and most other states were enjoying strong pickups in tax collections.
Brownback and his defenders have blamed their revenue shortfall on the federal government (natch). They say that the fiscal cliff deal in late 2012 drove investors to accelerate capital gains realizations to beat a tax hike on investment income. It certainly did that, but given that gains are less than 10 percent of individual income, blaming the state’s dramatic decline in revenue on capital gains timing is pretty lame.
Besides, while Kansas individual income tax revenues bumped up a bit in 2013 over 2012 (as the fiscal cliff theory would suggest), the increase was only about $23 million. From 2013 to 2014, income tax revenue dropped by far more–by $713 million.
And that brings us to the bottom line. Since the first round of tax cuts, job growth in Kansas has lagged the U.S. economy. So have personal incomes. While more small businesses were formed, many of them were merely individuals taking advantage of the newly tax-free status of those firms by redefining themselves as businesses.
The business boom predicted by tax cut advocates has not happened, and it certainly has not come remotely close to offsetting the static revenue loss from the legislated tax cuts.
One can argue whether cutting taxes is a good thing. One can argue about whether government is too big. One can even argue about whether low taxes increase business activity. But one cannot credibly argue that tax cuts increase revenue or even pay for themselves. They didn’t for Ronald Reagan. They don’t for Sam Brownback. They won’t for the next politician who tries—whether he (or she) is in Washington, D.C. or in some state capital.