Don't call Kansas' tax-slashing experiment a total failure quite yet
Republican presidential candidates touting big tax-cut plans should be sobered by what's happening in Kansas right now. The state legislature is scrambling to pass a budget that would close a projected $400 million shortfall in the next fiscal year. The fiscal crisis is the result of red ink that started gushing after the state passed massive tax cuts in 2012. Back then, Gov. Sam Brownback, a Republican, predicted, "Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy."
As natural economic experiments go, this was a pretty bold one. The top personal income tax rate was reduced from 6.5 percent to 4.9 percent — and eliminated for small business owners who file as individuals. The reduction was "the biggest tax cut of any state, relative to the size of its economy, in recent history," according to Andrew Wilson, a fellow at the Show-Me Institute, a free-market think tank in Missouri. Economist Arthur Laffer, a Brownback adviser and the "supply-side" architect of the 1980s Reagan tax cuts, called it "a revolution in a cornfield. Brownback and his whole group there, it's an amazing thing they're doing. Truly revolutionary."
But it's hard to see any economic revolution in the data — at least not yet.
Over the past two years, Kansas' jobless rate has fallen by 1.1 percentage point — from 5.4 percent to 4.3 percent — versus a 1.5-point drop for its four neighboring states and a 2.2 point drop for the U.S. economy overall. And the Sunflower State's labor force participation rate has been flat. Nor does the Kansas economy appear to be gaining much momentum as the tax cuts' supposed pro-growth effects finally "kick in." Over the past six months, the Philadelphia Fed's economic activity tracker finds Kansas again lagging the overall U.S. economy. And in April, Kansas wage and income growth trailed the national average.
The reaction to these numbers by Democrats and left-wing pundits has been, unsurprisingly, scathing. New York Times columnist Paul Krugman calls the Kansas experiment a "spectacular policy failure" that the GOP will fail to learn from because "gold bugs and Austrians are more dominant in GOP circles than they were before seven years of wrongly predicting runaway inflation."
Let's set aside the liberal hyperbole for a moment, and instead ask a serious question: What should Republicans learn from the Kansas experiment, especially the GOP's crop of White House wannabes who have plans to deeply cut top tax rates?
First, don't expect tax cuts to pay for themselves or even come close. They almost never do. That should be clear not only from the Kansas experiment, but the Bush tax cuts in the 2000s and the Reagan tax cuts in the 1980s. Tax cuts need to be accompanied by budget cuts or some other tax increases or risk bigger deficits.
Second, don't expect an immediate economic boom. This is one reason why tax cuts don't pay for themselves. Republicans often favor high-end tax cuts, but such reductions may be more likely to change long-term incentives than provide short-term stimulus. If you're looking for a quick fillip, recent research by University of Chicago economist Owen Zidar finds the "stimulative effects of income tax cuts are largely driven by tax cuts for the bottom 90 percent." Also, the link between job growth and tax changes for upper-income earners appears to be "weak to negligible" over the business cycle.
Third, focus on the long term. Whatever their fiscal impact, the Kansas tax cuts may yet earn some significant economic benefits. A new paper by Enrico Moretti and Daniel Wilson, "The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists," finds that state taxes "have a significant effect on the geographical location of star scientists and possibly other highly skilled workers." They calculate, for instance, the effect of New York cutting its marginal tax rate on the top 1 percent of earners in 2006 was "12 fewer star scientists moving away and 12 more stars moving into New York, for a net increase of 24 stars, a 2.1 percent increase." Now, that may not sound like much bang for the buck, but it only took the arrival of two pretty smart guys, Bill Gates and Paul Allen, to launch Seattle's tech boom. Likewise, while the Reagan tax cuts may have not boosted U.S. productivity in the 1980s, a case can be made that changing incentives played a key role in the 1990s tech boom. The lesson from Kansas should not be that we ought never, ever cut taxes for rich people or business.
And indeed, there may already be some green shoots. As Wilson points out in a Wall Street Journal op-ed, the state has significantly improved its private-sector job growth versus other states.
So be patient, Kansas. And while you're waiting, get those bills paid!