Kansas experiment

The Kansas experiment was a name given to a controversial and widely noted tax-cutting policy/agenda of Kansas Governor Sam Brownback that began with Brownback signing a bill cutting state taxes (Kansas Senate Bill Substitute HB 2117), in May 2012, and ended with the Kansas legislature's repeal of the bill in June 2017. It was one of the largest income tax cuts in the state's history. The Kansas experiment has also been called the "Great Kansas Tax Cut Experiment", the "Red-state experiment", "the tax experiment in Kansas", and "one of the cleanest experiments for how tax cuts affect economic growth in the U.S." The cuts were based on model legislation published by the conservative American Legislative Exchange Council (ALEC), supported by supply-side economist Arthur Laffer, anti-tax leader Grover Norquist, and the influential industrialists Charles and David Koch. The law cut taxes by US$231 million in its first year, and cuts were projected to total US$934 million annually after six years, by eliminating taxes on business income for the owners of almost 200,000 businesses and cutting individual income tax rates. Brownback compared his tax policies with those of Ronald Reagan, and described them as "a real live experiment", which would be a "shot of adrenaline into the heart of the Kansas economy", and predicted that by 2020 they would have created an additional 23,000 jobs. However, economic growth was consistently below average during the experiment, and by 2017, state revenues had fallen by hundreds of millions of dollars, causing spending on roads, bridges, and education to be slashed. The Republican Legislature of Kansas voted to roll back the cuts; although Brownback vetoed the repeal, the legislature succeeded in getting the two-thirds vote necessary to override his veto. Several reasons have been given to explain its failure. Economic growth under the new lower tax rates generated only enough new revenue to offset 10–30% of most of the initial tax cut, necessitating spending cuts to avoid deficits. Kansas's elimination of pass-through income (projected to apply to 200,000 taxpayers, but used by 330,000) created a loophole which allowed many taxpayers to restructure their employment to completely avoid income taxes, thereby additionally decreasing revenue. According to tax policy theory, tax cuts generate only modest economic growth, which comes only in the long term, not in the short term.

History

Background

As a conservative Republican Senator from Kansas, Brownback had been reelected by large margins in 1998 and 2004, and had also run briefly for president in 2008, withdrawing before the primaries began. In 2010 he ran for governor, defeating his Democratic opponent Tom Holland 63.3% to 32.2%. Also winning a sweeping victory in 2010 in Kansas was the Tea Party movement of the Republican party, whose members largely shared Brownback's views and who made up most of the Republican majority in the 2010 Kansas House of Representatives—the largest majority in half a century. When Brownback took office in January 2011, the US was still recovering from the Great Recession. In addition, there was a feeling in the state that economic growth in Kansas had been lagging behind other states in the region "for years," according to Kenneth Kriz, professor of public finance at Wichita State University. Conservatives believed a large tax cut would "boost investment, raise employment, and jump-start the economy", a theory sometimes described as supply-side economics or trickle-down economics. Reducing taxes was one of Brownback's two major stated goals as governor (the other being to increase education spending). Some Kansans interviewed by a journalist and Burdett Loomis, a political scientist at the University of Kansas, speculated that Brownback hoped that, after his failed first attempt in 2008, the success of the tax cuts would help launch another campaign for the presidency.

Legislation

Kansas Senate Bill Substitute HB 2117, "one of the largest income tax cuts in Kansas history", was introduced in January 2011, approved by Brownback in May 2012, and became effective on July 1 of the same year. A key part of the bill was the elimination of taxes on "pass-through" income. This was income that businesses — such as sole proprietorships, partnerships, limited liability companies, and subchapter S corporations — pass on to their owners instead of paying corporate income tax on. Before HB 2117 in Kansas, these owners paid a 7% individual income tax on their income. The bill cut the state's individual income tax rates and cut the number of individual income tax brackets from three to two. Specifically, the top income tax rates were cut from 6.45% and 6.25% to 4.9%, allowing higher earning taxpayers to pay the same marginal rate as the middle class; the bottom rate was reduced from 3.5% to 3%. Brownback planned to bring those rates down even more in future years. The original bill proposed by Brownback included a provision to offset the losses expected to result from the cuts by increasing the state sales tax and eliminating numerous tax credits and deductions. The legislature removed these offsets in the final bill.

Initial reception As the bill was signed, supporters predicted an economic revival in Kansas, while opponents predicted an unparalleled budget crisis. Brownback stated the plan would deliver a "shot of adrenaline" to the Kansas economy. His administration projected the creation of 23,000 jobs a year in Kansas in addition to those created by natural economic growth. After signing the bill, Brownback argued that the cuts would pay for themselves through the increased revenue resulting from boosting the state's economic growth. Supporters pointed to projections from the conservative Kansas Policy Institute predicting that the bill would lead to a US$323 million increase in tax revenue. Less supportive was a forecast from the Legislature's research staff indicating that a budget shortfall would emerge by 2014 and grow to nearly US$2.5 billion by July 2018. In June 2012, Brownback stated on the MSNBC show Morning Joe, "On taxes, you need to get your overall rates down, and you need to get your social manipulation out of it, in my estimation, to create growth. We'll see how it works. We'll have a real live experiment." He also called it a "red-state experiment".

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