Experimenter-in-chief Sam Brownback.

Photographer: David Paul Morris/Bloomberg

Kansas Tried Tax Cuts. Its Neighbor Didn't. Guess Which Worked.

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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For the past few years, Kansas's Republican Governor Sam Brownback and his allies in the state's legislature have been conducting a fiscal experiment involving big cuts in income taxes for individuals and businesses. The theory was that this "march to zero income taxes," as Brownback has called it, would spur entrepreneurship, economic growth and lots of job creation -- 25,000 new jobs in each of the next four years, Brownback pledged during his successful re-election campaign in 2014.

There have been repeated budget shortfalls since Brownback first took office in January 2011, which have led to repeated proclamations in the national news media that the Kansas experiment has failed. In the sense that the tax cuts haven't paid for themselves, that's true.

But the budget crises have helped Brownback push through the policies he favors -- he and the legislature have so far made up for the lost revenue with increased sales taxes and cutbacks in spending on education and other government functions. One goal, as prominent backer (and index-fund pioneer!) Rex Sinquefield explained last year, is to shift taxes from income to consumption. Another is just to shrink the state government.

Has this approach succeeded in stimulating Kansas's economy and creating jobs? To know that for sure you'd have to know what would have happened in the absence of Brownback's experiment, which is of course not possible. But there is a simple substitute -- just look at what's been happening in Nebraska.

Kansas has more people than its neighbor to the north: 2.9 million to 1.9 million. But by other measures -- median household income, per-capita income, percentage of the population living in urban areasacreage under cultivation -- the two states are pretty similar. They're also both run by Republicans, although Nebraska's legislators are elected via a nonpartisan primary and runoff that seem to reward moderation in a way that Kansas's more conventional elections don't. While Nebraska has elected governors with Brownbackian opinions on taxes, the legislature has yet to approve a Kansas-scale tax experiment. Which makes it an imperfect but possibly useful scientific control.

With that in mind, here's where the two states' unemployment rates have gone since Brownback took office:

Kansas doesn't look bad at all here: The unemployment rate remains higher than in Nebraska (which is tied with Colorado for fourth-lowest unemployment rate in the country), but it has fallen farther. Still, sometimes the unemployment rate falls because fewer people are looking for work. And, in fact, employment has been rising more slowly in Kansas than in Nebraska (I've indexed the two states' employment totals to a shared starting point of 100 to make them easier to compare):

Kansas has lagged Nebraska in job creation since 2011, and the gap has widened since late 2014. Instead of adding the 25,000 jobs a year that Brownback promised, Kansas actually lost 5,400 jobs over the 12 months ending in February.

I remembered from a recent column about states with struggling economies, though, that Kansas ranks 10th among U.S. states in crude oil production (Nebraska is 22nd, with only a tiny fraction of Kansas's production), so I wondered if it was the oil bust of the past year that had dragged the state down. I stripped out oil-related jobs, and got this:

This doesn't look great for Kansas. The overall gap is only slightly smaller, and the growing divergence in performance since 2014 is still apparent. That could be because a higher percentage of Kansans than Nebraskans work in manufacturing, and the current global economic slowdown has been tough on manufacturers. Again, Nebraska isn't a perfect comparison. But overall, while I think it's too early to label the Kansas experiment a failure, it hasn't delivered impressive results on the job front.

Then again, how could any reasonable person have expected that it would? When Brownback took over, Kansas was a state with a below-average tax burden in a part of the country that wasn't growing very fast. The Midwest remains the region of the U.S. with the slowest 5-year population growth, according to the Census Bureau. The tax cuts may eventually knock Kansas a few rungs down in the tax rankings (the most recent data available is from 2012), but by themselves they're not going to turn it into Texas -- a fast-growing, low-tax state that Brownback has often named as an economic model. In the meantime, the damage being inflicted on the state's educational system may begin to exercise an economic drag of its own. Tax rates matter, but so do lots of other things.

  1. The monthly state employment numbers from the Bureau of Labor Statistics don't break things down further than "mining and logging." Having driven through Kansas and Nebraska, I am confident that they don't have significant logging industries, and data from the Quarterly Census of Employment and Wages indicates that most mining employment in Kansas is related to oil and gas extraction. (Nebraska has hardly any mining employment at all.) So I took the monthly mining and logging jobs numbers for both states, tripled them to roughly reflect the multiplier effect of such jobs, then subtracted those figures from the state employment totals.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net