Has Kansas given up on tax cuts?

This story has been bubbling to the surface for a while now and will likely come as a disappointment (at least on the surface) to fiscal conservatives who prefer to leave money in the pockets of businesses and consumers in our capitalist system. One of the great laboratories for tax cuts as a path to prosperity has been the state of Kansas where Governor Sam Brownback shepherded through steep reductions in tax rates back in 2009. Since that time however, the predicted surge in business activity has failed to materialize and the state’s budget has been in perilous condition. After giving the plan several years to work and enacting some dramatic spending cuts to make up the difference, even the GOP majority in the legislature sounds as if they are ready to throw the Governor under the bus. (Yahoo News)

After he became Kansas governor in 2011, Sam Brownback slashed personal income taxes on the promise that the deep cuts would trigger a furious wave of hiring and expansion by businesses.

But the “shot of adrenaline” hasn’t worked as envisioned, and the state budget has been in crisis ever since. Now many of the same Republicans who helped pass Brownback’s plan are in open revolt, refusing to help the governor cut spending so he can avoid rolling back any of his signature tax measures.

If Brownback won’t reconsider any of the tax cuts, they say, he will have to figure out for himself how to balance the budget in the face of disappointing revenue.

“Let him own it,” Republican Rep. Mark Hutton said. “It’s his policy that put us there.”

All economic theories are conditional so this needs to be put in context. It’s a debate which Ed and I have had here over the years without reaching any real consensus, but Kansas seems to be a real world example of the maxim that you can have a revenue problem even if you have a spending problem. To understand this in the framework of Kansas we need to look at the time period when this tax cutting binge was enacted. The move was made at the height of the economic collapse when unemployment was spiking and investment capital was largely hanging out on the bench. The tax cuts were no doubt a welcome relief to both workers and businesses, but it simply wasn’t a time when the confidence existed to take that extra money and dump it back into a growth agenda.

Farmers and business owners were given huge tax breaks, but they largely put the money in their pockets against hard times. Hiring did not go up and new businesses were not attracted to the state in significant numbers. This led Brownback to cut spending wherever possible (not that this is a bad thing, mind you) but the continued cuts have grown increasingly unpopular even with his base.

Last month, Brownback ordered $17 million in immediate reductions to universities and earlier this month delayed $93 million in contributions to pensions for school teachers and community college employees. The state has also siphoned off more than $750 million from highway projects to other parts of the budget over the past two years.

Does this mean that tax cuts don’t work? As I said above… it’s situational. In Texas they’ve been cutting taxes right and left and the state is prospering. But Texas was in a very different situation than Kansas, with energy resources which got them out of the recession faster than many other places and a pro-business environment which was already building their economy at a brisk pace. In a situation like, that tax cuts toss more fuel on the economic fire and you have a formula for success. In places like Louisiana it was much more of a mixed bag, but Bobby Jindal’s tax cuts weren’t landing in such fertile ground and the results were, on average, a losing proposition. New Jersey was another case with plus and minus factors which balanced out and didn’t provide the kind of growth Texas saw.

Sam Brownback is sticking to his guns for now, but he’s going to have a revolt on his hands shortly. He’s made so many cuts already that it’s hard to argue that Kansas has a spending problem at this point. But they definitely have a revenue problem and he’s going to have to fix it sooner or later.