The Kansas Supply-Side Experiment Unravels
Tax cuts were supposed to spur growth, boost revenue and create jobs. The results were the exact opposite.
Bloomberg, June 19, 2017
When a governor announces an economic theory as a solution to a state’s fiscal problems, while challenging all comers to observe the results, that’s something I want to pay attention to. And so for the past five years, I have been watching the public-policy experiment in Kansas with great fascination.
With the state legislature now rejecting the governor’s experiment, we can move onto to the next phase: Not recrimination and blame, though there is lots of that going around. Instead, I want to look at how the experiment played out, and what lessons there are to be learned from it.
A quick refresher: Kansas’s Republican Governor Sam Brownback pushed through a substantial change in the state tax code, centered around lowering rates. He promised it would lead to more growth, tax revenue and jobs. Instead, there have been persistent tax revenue shortfalls, huge spending cuts and disappointing job creation. As my Bloomberg View colleague Justin Fox wrote, Kansas is badly lagging its neighbors, all of which have similar economies. Even worse, people (especially young people) are fleeing the state. Kansas was one of the highest outbound migration states in 2014, 2015 and 2016. 1 The vast majority of people who have moved out were either transferring when their companies left or were seeking employment elsewhere.
Other states are engaged in different policy experiments: minimum-wage increases, different tax cuts, privatization of public assets and so on. Still, there are important lessons to be learned from the Kansas experience.
Start with a good theory: As Presidents John F. Kennedy and Ronald Reagan demonstrated, to get people to change their behavior requires a major shift in incentives. Both made sweeping alterations to the tax code, removing tax shelters and lowering confiscatory rates.
This isn’t what Brownback’s version of tax cuts did; his were more akin to the George W. Bush tax cuts of the early 2000s. Lowering tax rates modestly at the federal level had a minimal effect on financial behavior, but it had a large impact on government revenues. Not surprisingly, Kansas’ results were similar.
Incentives matter: There was a large behavioral incentive, but it was for financial engineering. Brownback eliminated taxes on limited liability companies and sole proprietorships. It isn’t surprising that lots of companies and individuals made these legal structural changes. But this was merely an alteration in form with no beneficial economic incentives.
Set reasonable benchmarks for success or failure: Brownback, despite making large promises, wasn’t specific in how success or failure should be measured. Specific economic metrics should have been set (unemployment, job increases, household income, tax revenue, etc.). It is important to include specific dates as well, not leaving the experiment open-ended.
Instead, Kansas lacked a robust approach to evaluating results. This is a poor strategy if you want to know how you are doing.
Originally The Kansas Supply-Side Experiment Unravels