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July 2017 Brief: Volume 24, Number 20

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Iowa Policymakers: Do Not Let Kansas or Liberals Scare You Away From Tax Reform

 

by John Hendrickson

 

 

Liberals and progressives across the nation are celebrating a supposed “victory” in the battle over tax policy after Kansas Republicans helped reverse the state’s tax cuts. Kansas Republican Governor Sam Brownback and the Republicans in the Legislature structured a series of tax cuts to lower the tax burden and eventually phase out the income tax and create economic growth. Kansas has become a symbolic battleground over the economic philosophy of tax cuts.

 

The 2012 tax cut passed by the Kansas Legislature and signed by Governor Brownback “simplified personal income taxes from a three-tiered system to two,” in addition to creating “an estimated $4.5 billion in tax relief over five years.”[1] Economist Stephen Moore noted, “The heart of the Brownback tax plan was to cut income taxes by 30 percent and zero out the tax on small business ‘pass-through’ income, so as to encourage new enterprise.”[2] Although the “pass-through” exemption for small businesses is controversial, Moore argues that it did result in more business being brought to Kansas.[3]

 

The problem over the Brownback tax cuts occurred when Kansas started to see lower than expected revenues along with lower energy and commodity prices.[4] This problem is similar to what Iowa faces today. In addition, the Kansas Legislature did not control spending. “Even as the 2012 tax reductions were projected to let Kansans keep $4.5 billion more of their money, the state increased spending in 2012 by $432 million,” noted economists Jonathan Williams and Ben Wilterdink.[5]

 

The Brownback tax cuts were blamed for causing both a budget deficit and crisis in Kansas, and liberals did not waste any time pouncing on the so-called “failed supply-side experiment.” “Unions, liberal interest groups, and the media have made the Kansas fiscal saga a national cause, a case study in the supposed horrors of supply-side tax cuts,” wrote Stephen Moore.[6] In addition, liberals argued that because of the Brownback tax cuts, state programs such as education suffered.

 

Stephen Moore argued that “the charge that schools and state government have faced savage cuts is mostly histrionics.”[7] As Jonathan Williams and Ben Wilterdink noted, overall spending on education actually increased.[8] “In 2017, per capita inflation-adjusted general fund spending in Kansas reached an all-time high and has soared 33 percent since 1997 and more than 10 percent this past decade,” wrote Moore.[9]

 

Williams and Wilterdink argued that “some of the claims regarding ‘reductions’ in education funding have centered on reductions in previously scheduled increases to one aspect of funding, without regard to increases elsewhere in the funding system.”[10] They also wrote, “Government often portrays getting a smaller than desired increase as a ‘cut,’ but state funding of education increased every year since 2011.”[11]

 

Even though his veto of the tax increase was overridden by the Legislature, Governor Brownback is not backing down and is still fighting against the $1.2 billion tax increase.[12] Governor Brownback argues that this tax increase will not only hurt future economic growth and job creation, but also families in Kansas.[13]

 

The question must be asked whether the Kansas story is a failure in conservative/supply-side economics, as the liberals claim, or a failure on the part of the Legislature to control spending. The answer is that the Kansas tax cuts are sound policy, but since the Legislature did not control spending the result was a budget deficit. Tax reductions are fiscal policy tools for creating not only economic growth, but also additional revenues. States such as Utah, North Carolina, and Wisconsin are seeing more economic growth because of lower tax rates. Kansas even has a low unemployment rate, which provides further evidence that the state has a spending problem.

 

Opponents of the Brownback tax cuts also do not take into consideration the fact that states with high levels of taxation, spending, and regulation are not doing well economically. As Stephen Moore wrote regarding the high-tax states of Illinois and Connecticut:

 

This experiment has been tested in nearby Illinois and in Connecticut with catastrophic results. Illinois and Connecticut both passed giant income tax hikes “on the rich” at about the same time Brownback was cutting them. Today, these two blue states are fiscal basket cases with debt levels so high their finances resemble those of a third-world country.[14]

 

Liberals are hoping the Kansas tax cut will discourage other states, including Iowa, from implementing fundamental tax reform. Even on a national level, liberals are using Kansas as an example to derail President Donald Trump’s tax reform agenda. Governor Brownback should be applauded for his courage in defending the tax cuts to make his state more economically viable. It is true that tax cuts must be accompanied by spending reductions. But whether on a state or federal level, the historical record demonstrates that lower tax rates have brought periods of economic growth. Liberals should be forced to answer this question: How many states or nations have taxed and spent their way to prosperity?

 

Governor Kim Reynolds and the Iowa Legislature should not fall for the scare tactics. Instead, they should look to states like North Carolina that have lowered rates and, in the process, created economic growth. The Kansas story is not a failed tax-cut experiment, but rather a warning about excessive government spending.

 

Endnotes:

[1] Jonathan Williams and Ben Wilterdink, “Lessons from Kansas: A Behind the Scenes Look at America’s Most Discussed Tax Reform Effort,” The State Factor, February 2017, American Legislative Exchange Council, Washington, D.C., 2017, p. 3.
[2] Stephen Moore, “What's the Matter with Kansas Republicans?,” The Weekly Standard, May 22, 2017, <http://www.weeklystandard.com/print/whats-the-matter-with-kansas-republicans/article/2008157#!> accessed on June 12, 2017.
[3] Ibid.
[4] Ibid.
[5] Williams and Wilterdink, p. 5.
[6] Moore.
[7] Ibid.
[8] Williams and Wilterdink, p. 9.
[9] Moore.
[10] Williams and Wilterdink, p. 9.
[11] Ibid.
[12] Governor Sam Brownback, “Governor Sam Brownback issues statement on legislative tax hike,” Office of Governor Sam Brownback, June 6, 2017, <https://governor.kansas.gov/governor-sam-brownback-issues-statement-on-legislative-tax-hike/> accessed on June 12, 2017.
[13] Ibid.
[14] Moore.

 

John Hendrickson is a Research Analyst with Public Interest Institute, Muscatine, Iowa.
Contact him at Public.Interest.Institute@LimitedGovernment.org.

 

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