Kansas Ends Bad Economic News by Not Reporting It

The math is simple: Tax cuts tend to reduce revenue, in Kansas’ case much more than expected. To change people’s behavior requires more substantial incentives than changing things by a few percentage points. The reduced revenue led to spending cuts that lowered quality of life. In response, rising numbers of people and companies have leftthe state. 

To understand how people react to economic incentives and disincentives, consider U.K. tax rates in the 1960s and ’70s. The top standard rate was 83 percent with a 15 percent super tax on high earners and a rate of more than 90 percent on unearned income. No wonder the Rolling Stones, the Beatles and other British musicians became tax exiles, moving to Switzerland, Brazil, Monte Carlo, the Netherlands, Luxembourg and the British Virgin Islands. Those damaging and confiscatory rates have since been reduced in much the same way that similarly economically harmful rates were cut in the U.S., most famously under Ronald Reagan.

Meanwhile, just consider what Brownback did. The elimination of taxes on pass-through income simply benefited existing business, many more of which took advantage of the change than expected. And really, who is going to move to Kansas now that the top personal tax rate is 4.6 percent versus 6.45 percent? I can tell you I’m not packing up the U-Haul.

Brownback had asked his Council of Economic Advisors to report to him to measure the impact of the tax cuts — likely because he expected good things. His critics have delighted in pointing out that the quarterly report was cancelled after it showed the opposite economic effect of what Brownback had promised.  “He specifically asked the council to hold him accountable through rigorous performance metrics,” Heidi Holliday, executive director of the Kansas Center for Economic Growth, told the Topeka Capital-Journal.

A summary of the Brownback record shows:¹

• Kansas’ gross state product fell behind the six-state region and the nation for the third straight year. (Kansas’ gross state product grew at a faster rate when compared to the region and the nation in three of the five years before Brownback took office in 2011).
• Private industry wages in Kansas grew at a slower pace last year than they did in the region and the U.S. — as they did during the past five years.
• The number of private business establishments in Kansas trailed both the region and the nation for the last year, again continuing a five-year trend.

By just about every measure, Kansas’ tax experiment has failed to meet the promised performance objectives. Killing the quarterly report won’t change this. If anything — if what Drucker said is right — ending the reporting may make things worse.

Brownback is now said to be considering tax hikes. He has paid the deserved price for his errors, with a 26 percent approval rating, the lowest of any governor in the U.S. The people of Kansas have paid a bigger price. Undoing the harm will take a new governor and, though it may seem far-fetched, I think he should step down and make way for fresh leadership.

Absent that, all we can do is to call out misguided economic beliefs wherever they appear.

¹ My Bloomberg View colleague Justin Fox showed a detailed comparison between Kansas and Nebraska – it wasn’t pretty for Kansas.