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 231 million in its first year, and cuts were projected to total 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."Kansas Legislature approves budget deal, after lawmakers deliver blistering critiques of state finances," May 2, 2016, Topeka Capital-Journal"Kansas Republicans Sour on Their Tax-Cut Experiment" February 24, 2017, The Atlantic 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 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 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".
In the spring of 2014, monthly revenue for state government "crashed", and fell "massively short of projections". The Washington Post and Michael Hiltzik, a reporter for the Los Angeles Times, warned that job creation and economic growth in Kansas were lagging those of its neighboring states. Nonetheless, many conservative sources were enthusiastic. The Wall Street Journal published an op-ed by Brownback where he called his experiment "A Midwest Renaissance Rooted in the Reagan Formula", compared his tax cut policies with those of Ronald Reagan, and announced a "prosperous future" for Republican-dominated Kansas, Oklahoma, and Missouri.
Brownback's tax consultant Arthur Laffer, a supply-side economist who predicted the cuts would support job growth, calling Brownback's policies "amazing ... Truly revolutionary." Influential anti-tax activist Grover Norquist defended Brownback's tax cuts as "the right thing for the economy", and claimed that Kansas was in better economic shape than the tax-cut critics alleged, and that the state had "provided a model, a successful model, that will phase out the income tax."
Results By early 2017, Kansas had "nine rounds of budget cuts over four years, three credit downgrades, missed state payments", and what The Atlantic called "an ongoing atmosphere of fiscal crisis". To make up the budget shortfall, lawmakers tapped into state reserves set aside for future spending, postponed construction projects and pension contributions, and cut Medicaid benefits. Since approximately half of the state's budget went to school funding, education was particularly hard hit. In addition to budget problems, Kansas was lagging behind neighboring states with similar economies in "nearly every major category: job creation, unemployment, gross domestic product, taxes collected".
Budget and revenue
By 2017, National Public Radio reported state lawmakers were seeking to close a $900 million budget gap, following nine previous budget cuts. Earlier efforts to close budget gaps had left Kansas "well below national averages" in a wide range of public services from K-12 education to housing to police and fire protection. In education, school districts dealt with cuts by shutting down the school year early, eliminating school programs, cutting maintenance, phasing out teaching positions, enlarging class sizes, increasing fees for kindergarten, and cutting janitorial personnel and librarians. School districts were consolidated and some schools were closed.
By early 2017, The Wichita Eagle reported that the governor proposed taking nearly $600 million from the highway fund over the next two and a half years to balance the state general budget, after having used 1.3 billion from the fund since 2011 for the same purpose. This first transfer of funds had already caused the Kansas Department of Transportation to "indefinitely delay" two dozen road expansion projects in April 2016. According to Kansas State Senator Carolyn McGinn, "we've had pretty good roads, but now we're starting to see the deterioration." Millions were also borrowed from the state pension fund. Kansas became the only state without a state-funded arts commission, and closed nine social service offices around the state.
The tax cuts contributed to credit rating downgrades, which raised borrowing costs and led to more budget cuts in education and infrastructure. Moody's downgraded the state's bond rating in 2014. S&P downgraded its credit rating first from AA+ to AA in August 2014, due to a budget that analysts described as structurally unbalanced, and again in February 2017 from AA to AA−.
Jobs and growth
By 2018, overall growth and job creation in Kansas had underperformed the national economy, neighboring states, and "even Kansas' own growth in previous years." Kansas' job growth lagged neighboring Missouri, Colorado, and Nebraska. In January 2014, following the passage of both tax cuts, the Nebraska labor force grew by a net 35,000 non-farm jobs through April 2017, compared to only 28,000 in Kansas, which has a larger labor force.
Election and popularity fallout
In 2014, Brownback ran for reelection, challenged by Paul Davis, the Democratic minority leader of the Kansas House of Representatives. Davis was endorsed by over 100 former and current Kansas Republican officials who criticized Brownback's leadership."Paul Davis secures endorsement of more than 100 former and current Republican officials," July 15, 2014, Wichita Eagle"Some in Kansas GOP Break With Gov. Brownback, Endorse Democratic Opponent," July 15, 2014, Wall Street Journal Brownback managed to defeat Davis by 3.69 percent,Sam Brownback prevails over Paul Davis for second term as Kansas governor, Wichita Eagle, Byron Lowry & Suzanne Perez Tobias, November 4, 2017. Retrieved March 13, 2017. a decline from the more than 30% margin he had gained in his first governor's race victory, thanks at least in part to effective campaign ads attacking Davis for his brief detention during a 1998 police raid of a strip club.Strip-club smear campaign orchestrated by Sam Brownback official, says Paul Davis, Wichita Eagle, Dion Lefler, September 20, 2014. Retrieved March 15, 2017.Three reasons the Paul Davis strip club story could hurt him in Kansas Politico, Sean Sullivan, September 22, 2014. Retrieved March 15, 2017.