Supply-side economics has been a subject of fierce debate ever since it came into the mainstream when Ronald Reagan was first elected president, in 1980. Do large tax cuts stimulate economic growth that makes up for the reductions in government revenue associated with lower tax rates, or do they just stimulate budget deficits?
As with so many questions, the answer is “it depends.” But in Kansas, where the administration of Gov. and former U.S. Sen. Sam Brownback has embraced the strategy, it’s looking like the result will be a whole lot of red ink.
Saying that they would provide a “shot of adrenaline” for the state economy, in 2012 Brownback pushed through a set of massive tax cuts. The income tax on small businesses was eliminated and the standard deduction for married couples filing jointly increased from $6,000 to $9,000. Three personal-income tax brackets of 3.5, 6.25 and 6.45 percent were reduced to two brackets of 3 and 4.9 percent.
Additional cuts enacted last year will push the top state income-tax rate down to 3.9 percent by 2018. By then, the total tax cut will amount to more than $4 billion. Even more cuts were passed in the waning days of the Legislature’s recent session.
So far, the results are not encouraging. In May, the Legislature’s nonpartisan research staff projected a $238 million shortfall in the approximately $15 billion state budget by July of 2017. But when tax revenues for April, May and June of this year came in a total of $334 million below benchmarks, the legislative research staff moved up the date for the projected shortfall by a year.
Moody’s downgraded the state’s bonds in May. This month, Standard & Poor's followed suit, citing Kansas’s “structurally unbalanced budget” and failure to match the tax cuts with spending cuts. By raising the cost of borrowing, the downgrades will exacerbate the failure to enact spending cuts.
S&P also said the tax cuts would leave the state with dangerously low reserves. Last month the Brownback administration said Kansas had $435 million on hand on June 30. The legislative research staff now says the number was $380 million.
And there’s little sign of adrenaline — at least so far. New business filings are up, but so are forfeitures and dissolutions. Overall, the number of net new businesses declined between 2012 and 2013.
The Reagan tax cuts did indeed provide a shot of adrenaline, helping topull the country out of its 1970s malaise and into the boom of the mid-1980s. But like the Kansas cuts, they weren’t accompanied by spending reductions and led to spiraling deficits. Supporters of the tax cuts counter that increased military spending during that time brought about the downfall of the Soviet Union and the end of the Cold War.
Whatever your view of them, there are two big differences between the Reagan tax cuts and what Gov. Brownback is doing in Kansas. The first is that federal taxes account for by far the biggest part of the overall tax burden. Changing state tax policy simply has much less economic impact.
Then there’s the magnitude of the cuts. When President Reagan took office, in 1981, the top individual income-tax rate was nearly 70 percent; by 1988 it was down to 28 percent. That kind of cut to a much larger portion of the overall tax burden had an exponentially greater impact than cutting Kansas’s top income tax rate from 6.45 to 3.9 percent over roughly the same amount of time.
Even if you believe in supply-side economics, the smaller impact that state and municipal taxes have on the overall economy and that, for the most part, the days of confiscatory tax rates are thankfully behind us make tax cuts a dubious choice as the centerpiece of local governments’ economic policy.
Charles Chieppo is the principal of Chieppo Strategies, a public-policy writing and communication firm.