The Lessons of Kansas

Three of the four business climate rankings reviewed here reward states with low or non-existent personal income taxes. ALEC’s Rich States, Poor States has been particularly outspoken in its assertions that income tax cuts are an effective strategy for state economic growth.

For advocates of income tax cutting, Kansas was to be the poster child. Governor Sam Brownback signed legislation in 2012 slashing income taxes and cutting the state budget by over 13 percent. The tax cuts had been pushed by Stephen Moore and by Arthur Laffer, author of ALEC’s Rich States, Poor States, who argued they would provide an “immediate and lasting boost” to the economy. The Governor claimed they would be like “a shot of adrenaline into the heart of the Kansas economy.”1 Laffer and Moore finally had the case study they had been pushing for to demonstrate the efficacy of drastic cuts in state income taxes, leading, they hoped, to ultimate elimination of the tax.

It is not as if the state of Kansas had been a laggard. From 2006 through 2012, the state had actually grown faster than the U.S. as a whole in five of the seven years. Then in 2013, the tax cuts took effect. But instead of boosting the economy, Kansas GDP actually declined by 1.1 percent in 2013, while nationally GDP grew at 1.3 percent. In 2014, Kansas growth once again lagged the nation, 1.4 percent vs. 2.2 percent. Estimates for 2015 show the trend continuing, with state GDP growth expected to be just half of the national rate. Furthermore, the state’s own projections for 2016 and 2017 indicate that Kansas’ growth in personal income will continue to lag behind the country as a whole.

In the 8th edition of Rich States, Poor States, Laffer and Moore argue that a proper assessment of the impact of the tax cuts on the Kansas economy should consider the state’s economic performance relative to the region’s or the nation’s before the tax cuts, and after. They also argue that the lackluster performance in 2013 is partly due to problems in the aircraft industry, and that the rest of the state economy actually did well that year.

These points are well taken. So let’s look at job growth in Kansas before and after the tax cuts, and let’s take into account the ups and downs of the aircraft industry. Aircraft manufacturing is concentrated in Wichita, and is a major driver of the entire Wichita economy. In the table below we look at total nonfarm employment growth in Kansas as a whole, in Kansas minus Wichita, and in the U.S.

From 2000 to 2012, before the tax cuts, total nonfarm employment in Kansas outside Wichita grew 2.1 percent, outperforming the nation, which grew at 1.8 percent. Wichita declined 3.5 percent during this period, leaving the state as a whole with just 0.9 percent growth, half the U.S. average. Thus the aircraft industry, and the Wichita economy generally, is entirely responsible for the state’s overall poor performance.

After the tax change, that is for the three years 2012-2015, Wichita actually grew 2.8 percent, a little below the growth of the rest of the state which was 3.6 percent. But the U.S. economy grew 5.6 percent. The bottom line is that, if one wants to treat the aircraft-based Wichita economy as a special case and focus on the rest of the state to determine the effects of tax cutting, for the 12 years before the tax cuts Kansas beat the national growth rate by nearly 20 percent, while for the three years since the tax cuts Kansas growth has lagged the nation’s, coming in at more than a third below the national rate.

Laffer and Moore also defend the complete exemption of income from pass-through entities (such as partnerships and S-corporations) in the Kansas tax cut law of 2012, a provision that remains despite controversy. Their support for this exemption consists of a statistic on new business filings, which set a Kansas record in 2012 of 15,000, then reached 15,780 in 2014. But if the law is really stimulating new business formation, this should be reflected in the number of new establishments actually opening for business, and the number of workers employed in those new establishments. Again, we should compare the performance of Kansas relative to the nation.

What we find is that from 2000 through 2011, Kansas accounted for on average each year .80 percent of the national new establishment openings, while in the three years since then, Kansas has accounted for on average .78 percent. Considering employment in new establishments, Kansas accounted for, on average, .95 percent of the U.S. jobs in opening establishments from 2000 through 2011, but only .90 percent since then. The exemption of pass-through income was supposed to make Kansas more “competitive” for new business, but instead the state’s share of new establishment openings and employment has declined since the tax cuts.

Meanwhile, the budget consequences have been disastrous. Operating reserves have been depleted. State aid for schools remains well below pre-recession levels. Yet in the long run a state’s economic health is dependent on a sound education system. States have a crucial role to play preparing the state’s workforce for the needs of a 21st century economy. Furthermore, a quality public education system is important for the state to attract investment by businesses providing good-paying jobs who need to attract qualified workers who want good schools for their children.

In defense of the Kansas experiment, Moore and Laffer now argue that we have to be patient; it will take more time to see results. While the “immediate boost” obviously did not materialize, they continue to defend the tax cuts, resorting to simplistic comparisons of groups of states to argue that tax cutting does work. They compare states with no income tax to states with high income tax rates, ignoring the basic principle that correlation does not demonstrate causation. A review of serious research that controls for all the other factors contributing to state economic growth, and that relies on evidence from all 50 states, shows little evidence that cutting personal income taxes will boost a state economy. (Read more about business taxes and growth, income taxes and small business, and taxes and migration.)

The Kansas experiment has been a costly one for the children of Kansas and for workers, who have seen sub-par job growth. And there is no reason to expect the long-term results will be any more supportive of the income-tax-slashing approach to economic growth.

 

1. Michael Leachman. “Kansas’ Economic Growth Continues to Lag, Despite Tax Cuts.” November 30, 2015. Center on Budget and Policy Priorities. http://www.cbpp.org/blog/kansas-economic-growth-continues-to-lag-despite-tax-cuts

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