Nicholas Johnson: What Does Kansas’ Botched Tax-Cut Experiment Portend for Other States?: "The budgetary disaster emerging from Kansas’ radical tax-cutting experiment...
...is making pro-tax-cut elected officials in other states uneasy. The Wall Street Journal reports this week that leaders in Oklahoma, Nebraska, and other states are expressing concern about the Kansas results and distancing themselves — at least rhetorically — from the Kansas failures. Despite their rhetorical backtracking, however, the tax cuts that policymakers in Ohio, Oklahoma, North Carolina, Wisconsin, and other states are pursuing aren’t all that different from the Kansas plan. As we’ve explained, these states should consider Kansas a cautionary tale.
Kansas in 2012 enacted perhaps the nation’s largest state tax cut ever. As we wrote earlier this year, and as the Journal and others have subsequently reported, state revenues have plummeted, employment growth has continued to lag the national average, and the state’s credit rating has been downgraded.
The Kansas tax cuts were followed, in 2013, by big tax cuts in Indiana, Ohio, North Carolina, and Wisconsin. While none were as big as Kansas’, they generally included many of the same ingredients: big cuts in tax rates for the highest-income households; very small tax cuts, or even tax increases, for lower-income working families; unjustified new breaks for businesses; and multi-year phase-ins, so that the full costs of the tax cuts could be hidden in out-year budgets.
Take, for example, perhaps the most foolhardy provision in the Kansas tax package: a complete tax exemption for all income from any business that’s considered a “pass-through entity” — a broad category that includes many law firms, accountants, medical practices, self-employed consultants, and others. Even the conservative Tax Foundation has flagged this provision as poor policy. Despite its abject failure to stimulate small-business development, Ohio and Missouri both have enacted versions of the same faulty provision.
Kansas Governor Sam Brownback once promised that the tax plan would provide a “shot of adrenaline” to his state’s economy. He’s now switched medical metaphors, likening the tax cut to surgery from which it will take his state a long time to heal. And to be sure, Kansas’ economy may yet recover. For the moment, however, it’s no surprise that elected officials in other states want to pretend their strategies are very different. Kansas’ experience suggests they might be better off avoiding the knife altogether.