Did the Kansas Tax Cuts Fail?
Authored by: Matt Palumbo
If you happened to read the Left’s reporting on the so-called “failed Kansas tax cuts experiment,” over the past couple of years, you couldn’t be faulted for concluding that on the issue of tax cuts, the science is settled. Just take a look at some headlines:
- NPR: As Trump Proposes Tax Cuts, Kansas Deals With Aftermath Of Experiment
- New York Times: Kansas Tried a Tax Plan Similar to Trump’s. It Failed
- The Guardian: Kansas’s ravaged economy a cautionary tale as Trump plans huge tax cuts for rich
- Mother Jones: Trickle-Down Economics Has Ruined the Kansas Economy
- CNN: How the grand conservative experiment failed in Kansas
What do the Critics Allege?
The narrative is relatively simple. Kansas enacted tax cuts “for the rich,” had expected blockbuster economic growth that would help the tax cuts “pay for themselves,” when in reality the State’s economic situation worsened following the tax cuts, with dwindling revenues and no enhanced economic performance.
So What Actually Happened?
Kansas Gov. Sam Brownback promised tens of thousands of new jobs and an economic renaissance in Kansas. He was elected in 2011, pushed his legislative agenda through the Statehouse, and signed his tax cut bill in May 2012. It initially lowered the top personal income tax rate to 4.9 percent from 6.45 percent, and eliminated income tax on profits for owners of limited liability companies, sub-chapter S corporations and sole proprietorships.
State tax revenues dropped $700 million the first year of the scheme, but don’t blame the minuscule cut in the income tax for that. Blame the not-so-brilliant idea of making all profits from passthrough entities (and for the self-employed) tax exempt. According to Forbes, the passthrough provision was a last-minute addition that wasn’t properly researched, and it’s the achieves heal of the Kansas tax cuts.
Even the generally anti-tax Tax Foundation testified against the exemption, noting that it incentivizes corporations to restructure as LLCs without making any actual economic improvements. The Foundation cites this change alone as contributing $200-300 million towards Kansas’ State budget deficit. When the exemption was passed in 2012, it was projected that 191,000 entities would take advantage of the provision. By 2015, that number had grown to 393,814 – twice as much as expected.
As they note, “It’s important to note here that while decreasing taxes is generally associated with greater economic growth, the pass-through carve out is primarily incentivizing tax avoidance, not job creation.” Indeed, the policy change incentivized tens of thousands of Kansans to claim their wages as business income, rather than from employment.
Kansas Economy Suffered Because Oil Prices, Not Tax Cuts
The Kansas economy grew 0.2 percent in 2015, which represented a decline from from 1.2 percent in 2014. Kansas ended 2015 with two quarters of economic growth, meaning they entered 2016 in a recession. By the end of 2016, Kansas ranked 45th in private-sector job growth for the prior 12 months. Colorado lead the region with the 10th highest rate of private-sector job growth, while Missouri and Nebraska rank 31st and 39th respectively. This is the basis for the claims the tax cuts failed to stimulate growth.
However, Kansas was in recession in 2016 for the same reason Canada also briefly fell into recession the same year: a collapse in oil prices. Kansas ranks 10th in crude oil production, and the price of a barrel of crude fell from around $100 in 2014, to an average of around half that in 2015 and 2016.
As one columnist at Investors Business Daily noted, “When these hard-hit sectors [oil and natural gas] are taken out of the equation, the remainder of the private sector workforce in Kansas outperformed its neighboring states of Missouri, Nebraska and Oklahoma.
The Republican controlled Kansas legislature recently pulled the plug on these tax cuts, but it’s foolish to infer any national implications from them.
Poorly designed tax cuts don’t prove that tax cuts are bad, nor are the Kansas tax cuts even remotely comparable to the Trump tax cuts.