Kansas Tax Cut Reality Check
The recent debt downgrade of Kansas by Standard and Poor’s (S&P) is being used by opponents of pro-growth tax reform to support their ongoing narrative blaming the Kansas tax cuts for all of the state’s financial woes. They claim that the 2012 tax cuts are solely responsible for the downgrade and have done nothing to boost the state’s economy. This narrative is wrong on several counts.
The first and most prominent misconception propagated by opponents is that the state’s budget shortfall this year is the fault of the tax cuts. As has been aptly pointed out by Will Freeland in a past post, the budget shortfall is a result of lower than expected economic performance and federal tax policy. As noted by the Congressional Budget Office, in the lead up to the federal Fiscal Cliff, people sold off their stocks and other assets to avoid the tax increases that would soon take effect. This revenue windfall caused many states, and Kansas specifically, to experience large increases in income tax revenue in 2013. This year, Kansas, like many other states, has taken in much less revenue. The Nelson A. Rockefeller Institute of Government has noted that 33 states showed mid-year revenue declines relative to projections, and 10 of those states faced double digit percentage declines. This is especially troubling for Kansas because revenue forecasters unwisely based its budget projections on the abnormally high revenues of 2013. These bad projections account for the lion’s share of the budget shortfall, not the tax cuts.
As for the debt downgrades, first by Moody’s then by S&P, Paul Krugman and others have distorted the truth about the reasoning given by the ratings agencies. Closer reading of the Moody’s analysis shows that an underfunded pension system and the use of nonrecurring funding measures are also primary drivers of the downgrade, not just the current budget shortfall. Kansas can easily reverse its debt downgrade by keeping spending in line with more accurate projections of revenues. S&P even states explicitly that its downgrade is a result of tax cuts “not [being] matched with offsetting ongoing expenditure cuts in the fiscal 2015 budget.”
Another fault in the critics’ narrative has to do with the short amount of time that has passed since the cuts were implemented. Their short-sighted analysis ignores the fact that the economy in Kansas has been stagnate for the past decade. In fact, Kansas’ underperforming economy was a motivating factor for legislators and Governor Brownback to pass pro-growth tax reform in the first place. The annual data presented in Rich States, Poor States shows that given enough time, lowering tax rates will have long term benefits for Kansas’ business environment, which will in turn increase both job creation and tax revenues.
The final issue with the recent criticism of Kansas is that even the data on the short-term impact of the tax cuts fails to offer a decisive conclusion. In fact, much of the data on Kansas reveals that things are going quite well for the state’s economy. When one factors out the government component of GDP, the Kansas economy is growing faster than the national average. The same can be said of private sector job growth, which in Kansas was higher during 2013 than neighboring Missouri, Oklahoma, and Nebraska. If anything, the data suggests that the tax cuts have contributed to an improvement in the state’s economic health. For example, in 2012, the state of Kansas saw over 15,000 new small business filings—more than any other year in state history.
These misconceptions illustrate that the liberal narrative about Kansas’ tax cuts is a fabrication designed by those who wish to suppress a state movement toward lower taxes. In an effort to support a partisan cause, opponents of the Kansas reforms have been quick to jump to conclusions too early, using facts that are cherry picked and in articles that ignore the context of larger problems like the Fiscal Cliff and unfunded pension liabilities. It is both intellectually dishonest and a disservice to a state finally making efforts to become more economically competitive.