The Guru of Supply-Side Economics Had a Very Good Election
Art Laffer was used to wearing the black hat. For much of 2014, as polls showed Kansas Governor Sam Brownback in danger of losing re-election, progressives expected supply-side tax cuts to be rejected. That meant a rejection of Art Laffer, the Steven Spielberg of supply side, the man whose napkin illustration of how lower taxes meant higher revenue changed American policy forever in 1981. A generation later, Laffer stumped with Brownback, endorsing his deep tax-cut plans because "states without income taxes have grown much, much faster."
Most people expected Brownback to lose. Plenty of columnists, including Tom "What's the Matter with Kansas?" Frank, pre-wrote the obituary of supply-side. And then Brownback won, taking 98 of Kansas's 105 counties. Laffer's verdict on the election?
"I liked it," he said.
Laffer paused, as if he had nothing else to say, until he decided to elaborate.
"The vindication is not in the Kansas vote," Laffer said. "The Kansas vote, very honestly, was based on a false issue that blew up. They made the large forecasting error of projecting revenues from unearned income. Forty states made that error. When you drop the income tax to zero, you don’t budget assuming more revenues coming in from that. It’s zero!"
Kansas had made those assumptions, though, and it had hurt. Brownback had pushed through a series of income tax cuts and business tax breaks that would reduce the top rate to 3.9 percent by 2018–not zero, but a steep decline. Republican moderates in Kansas gained boldness and momentum in June, when ruling conservatives had to explain why they'd collected $330 million less in annual tax revenue than expected. In October, right before the election, the state collected $23 million less than predicted. Brownback's Republicans theorized that the timing of the "fiscal cliff" deal made too many people advance their capital gains realizations, hence the revenue fall-off. Democrats and moderates expected that to be debunked. It wasn't, not before the election.
This was understandable. "If you ever looked into the details of how states forecast their revenues, you’d die," Laffer said with a chuckle. "You go into a big, grand reception room that looks like Paris, where the data comes in. Then you go outside and there’s a chicken coop. But Sam won. We’re past it. Every one of the tax-cutting governors won, and the tax-increasing governors lost. Connecticut and California, they won, but if you look at Massachusetts, Illinois, Maryland, the incumbent parties that had hiked taxes were rejected."
It was actually worse than that for progressives. Only after the dust settled did progressives in the other 49 states realize the voter backlash caused by an environmental tax, pushed through by Maryland's ruling Democrats, that penalized the building and upkeep of surfaces that did not absorb rainwater. Conservatives branded that the "rain tax," and won the night's biggest upset, in a state that–unlike Kansas–countless DC pundits and reporters call home.
"The states that cut their taxes really outperform the states that raise them," Laffer said. "People will see that. It's really hard to balance a budget on the backs of unemployed, and people really do leave states when that's tried. Look, the problem with cutting taxes is that you are going to suffer short-term losses in revenues. When you raise taxes you think you've got a windfall. Then in a few years, you’re Detroit. Kansas, by contrast, is going to do very well. Kansas City is going to be located in Kansas, not Missouri, if you give it a couple years."