Kansas' Republican revolt against tax cuts

Like most Americans, you're probably transfixed by the reality show that is Donald Trump's presidency. But take a moment to focus on Kansas, because something remarkable just happened there: Republicans revolted against one of their own to pass a tax hike.

Back in 2012, Republican Gov. Sam Brownback spearheaded a massive cut to the state's business and income taxes. Brownback characterized it as a "real live experiment," testing conservative tax policy prescriptions to their fullest. The assumption was that by slashing tax rates, job and economic growth would get a big boost.

Instead, Kansas has spent the last five years fending off a series of brutal budget crises. Faced with infuriated voters, Kansas' GOP-dominated legislature finally knuckled under and agreed to a tax hike. Tax rates still won't hit their pre-Brownback levels. But the increase will be enough to bring in $1.2 billion in additional revenue, and plug a $900 million two-year shortfall.

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Brownback, of course, is not a fan: "This is bad for Kansas and bad for the many Kansans who would have more of their hard-earned money taken from them," he said.

Brownback initially refused to sign the legislature's bill, which died at the governor's desk. But on Tuesday night, Kansas lawmakers finally cobbled together the supermajorities needed to override Brownback's veto, because the governor's own party judged his grand conservative tax experiment a failure.

The basic story conservative tax cutters tell is that by letting people keep more of their paychecks, you encourage them to be more productive workers. Thus the economy grows.

Now, this story is fuzzy even on its own terms: Let people keep more money from the work they're already doing and they might decide they can work less! But on top of that, the tax cuts need to be big on the individual level to have any real effect. Brownback dropped taxes for people making less than $30,000 by 0.5 percentage points. For people making more than $30,000, the cut was at most 1.55 percentage points. Now, he did also increase the state's standard deduction by a few thousand dollars. But overall, while the cuts resulted in massive aggregate revenue losses, they just didn't make a big difference for individuals' economic behavior.

The big exception was taxes for certain classes of small businesses, which were cut to zero. But this gets us to Brownback's second mistake: Businesses don't create jobs or increase wages just because they suddenly have extra money lying around. They increase those things when they feel they must to stay competitive, grab market share, or take advantage of rising demand.

Reporters talked to individual businesses in Kansas, and they all told some variation of the same story: Having the extra money from the tax cut was great, but they didn't see sales increase, so there was no reason to hire more people.

To increase sales, Kansas would need to move more money down the income ladder, to the people most likely to spend it immediately. But while the tax cuts did provide some relief to the working class, they were still tilted toward higher earners and business owners, who have less propensity to spend. And again, the cuts weren't big enough on a per-person basis to make much difference.

The big assumption behind these sorts of supply-side gambits is that demand for goods and services is robust; businesses just can't take advantage of that demand due to barriers like taxes and regulations. But if a slump in aggregate demand is actually the problem, tax cuts for businesses won't accomplish squat.

That brings us to the last point.

People often analogize government finances to family budgets: You can't let your revenue fall too far below your spending, or you'll wind up mired in debt. What this lame analogy often misses is that the federal government has the unique job of controlling the supply of the currency in which it taxes, spends, and borrows. The "family budget" metaphor doesn't apply at all to the federal budget. But it does apply to state governments like Kansas, who don't control the currency.

When Brownback blew a massive hole in the state's revenue, Kansas had to cut public investment by equal amounts, particularly in education. The state government's contribution to aggregate demand went down. On top of that, lots of people in the education system lost their jobs or saw their wages cut, so their spending in the economy went down too. Businesses in many parts of the state saw even fewer sales than they did before.

Kansas' economy has improved overall over the last five years, but so has the entire country's. In that context, Kansas' performance is middling at best. The state's employment numbers and the size of its economy grew more slowly than the nation's, and its share of national business creation actually shrank.

In fact, a fair share of the business creation Kansas did see was arguably just tax avoidance: Individual earners refiling as business entities to take advantage of Brownback's big tax cut for small business income.

The only concrete result Kansas ever got from Brownback's experiment was a never-ending series of budget crises. Eventually, even his fellow Republicans decided enough was enough.