When Kansas Republican lawmakers voted to raise state taxes last week, they were not only rebuking their own governor, they were tacitly admitting that his tax cuts hadn't produced the economic boom their proponents promised.
It is not just that tax cuts didn't achieve their purpose, though. New research suggests that the cuts were, in fact, counterproductive.
A working paper by economists at Oklahoma State University suggests that cutting taxes actually may have damaged Kansas's economy, resulting in fewer jobs, reduced incomes and a slower pace of growth.
Distinguishing among the national and global factors that affect a state's economy is difficult, but the paper is some of the most specific and detailed research yet on the consequences of the cuts for ordinary Kansans.
Gross state product — a measure of the overall size of Kansas's economy — increased about 7.8 percent less than it would have had Gov. Sam Brownback (R) not cut taxes, according to the paper, which is being reviewed for publication. The number of Kansans working has increased 2.6 percent less than it would have otherwise, the results suggest. Brownback's policies also reduced the share of the state's population participating in the labor force.
Reduced taxes forced the state to spend less, which could have brought down the overall level of demand for goods and services in the state, the economists believe. At the same time, concern about whether the state would be able to balance its budget might have deterred businesses from making major new investments.
The authors also studied Wisconsin, where Gov. Scott Walker (R), a 2016 presidential candidate, also cut taxes. Although those cuts did not have as clear a negative effect on the state, they did not appear to benefit Wisconsin's economy, either.
“Both experiments seem to not be working,” said Dan Rickman, who wrote the paper along with his colleague Hongbo Wang.
An underperforming economy
Brownback brought down taxes beginning in 2012, allowing wealthy taxpayers to pay the same marginal rate as the middle class by eliminating the uppermost of the three brackets in Kansas's income-tax scheme. He also allowed taxpayers to exempt income from small business, with the goal of fostering entrepreneurship in the state.
The governor and his Republican allies said that these changes would have benefits for ordinary Kansans.
“Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy,” Brownback wrote in 2012.
Since then, however, Kansas's economy has consistently lagged behind that of neighboring states and the country as a whole. Brownback, though, has argued that Kansas's poor performance is a result of other factors, and that the tax cuts are beginning to have their intended effect despite those obstacles.
It is difficult to identify the cause of a downturn in a state's economy. Local conditions and global forces can combine in ways that are not easy to observe or understand. In Kansas's case, a strong dollar relative to foreign currencies has made U.S. agricultural exports more expensive, which is bad news for the state's wheat farmers.
One approach would be to compare Kansas to other agricultural states in the Great Plains, but there are important differences. States such as Oklahoma and North Dakota have come to rely on more shale-gas production, while Kansas has long had an important aerospace sector.
Instead, using historical data from a variety of other states with similarly structured economies, Rickman and Wang created an index to use as a point of comparison for Kansas. This composite benchmark almost exactly mimics the actual data from Kansas before Brownback took office, showing that it is a useful indicator of the broader economic forces affecting the state's economy in general.
After Brownback started cutting taxes, though, the data on the state's economy diverges from the benchmark. That suggests Kansas's economy performed worse than what would have been expected without the tax cut.
“It's an important piece of work,” said Jared Bernstein, who served as chief economist to Vice President Joseph R. Biden Jr. and was not involved in the study. “If we were trading in the currency of facts, Kansas never would have tried — never would have undertaken — this experiment.”
What went wrong
Economists were not surprised by the results of the research. As the government in Kansas was forced to reduce its expenditures, the state's employees, suppliers and contractors had less money to spend. That, in turn, limited overall demand in the state.
Meanwhile, economists generally think that any benefits from reducing taxes are likely to accrue only over the long term. Because Rickman and Wang could use only five years of data, they might not have been able to identify any of those benefits, argued Aparna Mathur, an economist at the right-leaning American Enterprise Institute.
Often, however, policymakers do not have that much time. As budget deficits increase, investors begin to worry about how the government will make up the difference. That uncertainty can become an economic burden in itself in various ways, discouraging people from starting or expanding their businesses.
Brownback, for instance, was forced to increase sales taxes halfway through the experiment to raise more revenue, which probably did not inspire confidence among retailers and consumers in Kansas. Likewise, President Ronald Reagan later had to undo many of the ambitious tax cuts he passed in the first year of his administration to keep deficits in check.
The proposal House Speaker Paul D. Ryan (R-Wis.) put forward last year could also damage the economy over the long term, as deficits inflated by Ryan's tax cuts could make taking out loans more expensive for ordinary firms and households, according to an analysis by the nonpartisan Tax Policy Center.
Noting that the results of the new study were more ambiguous for Wisconsin than for Kansas, Mathur argued that Wisconsin policymakers relied on more realistic projections about how their tax cuts would affect the state's budget and prepared accordingly.
“Maybe the larger lesson is: Let’s not cut taxes all the way to zero,” Mathur said. “Let’s not cut taxes to zero without having a great plan to make up the taxes in the short run.”