How trickle down economics and Republican tax cuts are ruining the State's economic future
During the 2014 midterm elections, Kansas found itself in the media spotlight in a way which was almost unprecedented for the state. Discussion of Kansas politics – or Kansas in general – is quite rare and often largely satirical. This election cycle, however, Kansas received intense scrutiny and attention from national (and even international) news organizations.
So why was so much attention paid to this quintessential flyover state in the months leading up to the 2014 election? One word: taxes. The then incumbent (and now reelected) Governor Sam Brownback was leading the state’s budget into deep deficits with his ill-advised tax policies. In the summer of 2013, Brownback fulfilled a major 2010 campaign promise to substantially decrease income taxes and completely eliminate the state’s tax on corporations.
These tax policies have created massive financial turmoil in Kansas with deep budget deficits, credit downgrades, and massive spending cuts following in their wake. Without question, the destruction already caused by these tax cuts nearly cost the Governor his job. Though like many Republican incumbents he was simply able to ride the wave of anti-Obama hysteria that drove so many conservative voters to the polls on November 4. Unfortunately for Kansans, the worst is still to come.
Brownback’s over-zealous approach to tax policy was driven by the same fallacious system of voodoo economics that led Ronald Reagan to so fundamentally transform the United States’ tax system in the 1980s. The proponents of supply side economics (often referred to derisively as “trickle-down economics”) argue that cutting top personal income tax rates and corporate taxes drives economic expansion and job growth and will actually increase tax revenues because of the economic multipliers provided by the prescribed tax cuts. One major problem with this theory: it simply does not work in reality.
Perhaps the most vocal supporter of this economic theory is Arthur Laffer, the “economist” who advised Ronald Reagan on tax policy during his 1980 presidential campaign. Laffer was recruited to advise Governor Brownback and his fellow ideologues on their tax cut plan. Unfortunately, Laffer and Brownback seem to have forgotten the experience of the 1980s, as the outcome of these policies in the Reagan years were massive federal deficits and no real improvement in the national economy.
The truth is that lowering income and corporate tax rates – especially on the wealthy, which supply-side economists emphasize – does very little to increase economic growth or create jobs. The economy is a much more complicated machine than these analysts realize, and their overwhelming focus on taxes leads them to make ridiculous and empirically vacuous claims.
For proof of how poorly trickle-down economics performs in reality, we need only to look at the economic history of the United States in recent decades. In the 1950s and 1960s, top marginal income tax rates were as high as 90% on the highest incomes, yet economic growth was substantially higher then compared to the 2000s. A recent report by the Congressional Research Service finds very little evidence that tax reductions have any relation to increased economic growth or job creation.
Another Congressional Research Service report that specifically analyzes the effects of reductions in marginal income tax rates for the wealthiest Americans finds similar—and even stronger—results. Not only are tax reductions for the wealthy not associated with improved economic performance but, instead, they actually produce greater income inequality.
Page 19 of the report says, “The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie… However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution… Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.”
These reports, which are corroborated by the vast majority of reputable economic studies, stand in stark contrast to the claims made by proponents of trickle-down economics like Governor Brownback and Dr. Laffer. Time and again, this economic theory has been disproven and rejected, yet it continues to find a home in the modern Republican Party where it is taken as dogmatic truth.
To see proof of the theory’s continued resonance with the GOP, one need look no further back in time than the 2012 presidential campaign when tax policies designed around trickle-down economics principles were a major part of the Republican Party’s platform. An analysis by the nonpartisan Brookings Institution found that then-candidate Mitt Romney’s tax reform proposals would fail to meet the ambitious and optimistic promises laid out in his platform and campaign rhetoric.
Romney’s tax plan included a 20 percent across-the-board reduction in income tax rates, a repeal of the estate tax and the alternative minimum tax, and the elimination of capital gains and other savings/investment taxes on households with incomes below $200,000 per year. His campaign promised to do all of these things while at the same time adding zero dollars to the federal deficit by eliminating tax loopholes for the wealthy and not raising taxes on households with annual incomes of less than $200,000.
The Brookings Institution’s analysis showed that these goals were simply incompatible with his policy proposals; in order for the plan to remain revenue-neutral (meaning it would add nothing to the federal deficit), tax deductions and credits would have to be eliminated in all income brackets from top to bottom. If his plans had been enacted in reality, the net result would have been an $86 billion tax increase on households making less than $200,000 per year, coming out to an average tax hike of $500 per household and nearly $2,000 for every household with children, all the while cutting the tax burden on individuals making over $200,000 per year by tens of billions of dollars.
Something very like this happened in Kansas when Governor Brownback enacted his tax reforms in 2012 and 2013, as the state offset some of the revenue reductions by increased the state’s sales tax. This was essentially a tax hike on lower-income individuals meant to make up for revenues lost due to income tax reductions which disproportionately favored wealthier individuals and households.
In the end, Kansas’ experience with voodoo economics has been very similar to what has been seen time and again when these policies are enacted. Over the next two years alone, the Kansas state government will lose more than $1 billion in revenue with only $380 million left in its rainy day fund.
Like every state, Kansas is required by its constitution to balance its budget every year, so borrowing to finance the impending deficits is not an option. This leaves the state with no other option than to cut spending by hundreds of millions of dollars in the next two fiscal years, $280 million this year and nearly $600 million the next.
The Governor has pledged to leave education spending unscathed during the budget-cutting process, but this will be mathematically impossible after this year’s series of creative accounting moves and pension-robbing schemes run dry. To plug this year’s abovementioned $280 million budget hole, Brownback and his conservative allies in the statehouse have done a number of things that would be laughable if they weren’t so tragic and damaging.
Most significantly, they decided to rob the state’s highway transportation fund of nearly $100 million and reduced spending on the state’s public employee pension system by nearly $40 million. In a bit of hilarious irony, the Governor is also being forced to take nearly $55 million from a Medicaid drug rebate program that received increased funding because of the Affordable Care Act. (That’s right, a GOP governor that refused to expand Medicaid is now taking money generated by the very program that he claims to despise).
On top of these more specific measures, the Governor is also slashing funding for all state agencies by 4 percent across-the-board, which will leave many agencies scrambling to continue their daily operations. As bad as things are going to be in the coming months, they will only become worse and worse as time drags on.
The state government has not released any specific details on how it plans to close the roughly $600 million deficit that is estimated for fiscal year 2016, but it will almost certainly have to be drawn from education funding; a violation of one of the Governor’s core 2014 campaign promises. Education funding in the state is already lagging behind levels in neighboring states, and further cuts will almost certainly have to target essential classroom services.
On top of all this, the Kansas economy is beginning to show signs of stagnation. Contrary to a pre-election report that showed massive jobs gains for Kansas in the third quarter of 2014, recently revised estimates have shown that Kansas actually lost over 4,000 jobs in the month of November and had only added an average of 1,000 for the prior months. All in all, Kansas finds itself in very dire straits.
So what does the future hold for my home state? Certainly nothing good. Slashing education funding will almost certainly harm the state’s long-term pool of human capital. Reducing transportation funding will, over an extended period of time, lead our infrastructure down a path of decline and degradation. And already, the state is seeing stagnant job growth and weak economic performance.
Contrary to what the Governor repeatedly told Kansas voters during the 2014 election, the sun is not shining in Kansas anymore thanks to his ill-conceived economic agenda. The future for my beloved state is very grim indeed.
Image 1: Center for Budget and Policy Priorities (www.cbpp.org)
Image 2: Kansas Health Institute (www.khi.org)
Image 3: Kansas Health Institute (www.khi.org)
Really well-written and informative. Beyond the irony of it being called the Laffer Theory, it is interesting that, to my knowledge, there is yet to be a single instance wherein its components were put into place and actually succeeded in doing what Laffer claims they would do. Which means that Paul Ryan and the incoming GOP majorities want to impose on an entire country an economic theory that has failed every time it was implemented. Heck, no wonder they will start by changing the CBO method of “scoring” major tax changes.