The Kansas Supply-Side Experiment Unravels
When a governor announces an economic theory as a solution to a state’s fiscal problems, while challenging all comers to observe the results, that's something I want to pay attention to. And so for the past five years, I have been watching the public-policy experiment in Kansas with great fascination.
With the state legislature now rejecting the governor’s experiment, we can move onto to the next phase: Not recrimination and blame, though there is lots of that going around. Instead, I want to look at how the experiment played out, and what lessons there are to be learned from it.
A quick refresher: Kansas's Republican Governor Sam Brownback pushed through a substantial change in the state tax code, centered around lowering rates. He promised it would lead to more growth, tax revenue and jobs. Instead, there have been persistent tax revenue shortfalls, huge spending cuts and disappointing job creation. As my Bloomberg View colleague Justin Fox wrote, Kansas is badly lagging its neighbors, all of which have similar economies. Even worse, people (especially young people) are fleeing the state. Kansas was one of the highest outbound migration states in 2014, 2015 and 2016. 1 The vast majority of people who have moved out were either transferring when their companies left or were seeking employment elsewhere.
Other states are engaged in different policy experiments: minimum-wage increases, different tax cuts, privatization of public assets and so on. Still, there are important lessons to be learned from the Kansas experience.
Start with a good theory: As Presidents John F. Kennedy and Ronald Reagan demonstrated, to get people to change their behavior requires a major shift in incentives. Both made sweeping alterations to the tax code, removing tax shelters and lowering confiscatory rates.
This isn't what Brownback’s version of tax cuts did; his were more akin to the George W. Bush tax cuts of the early 2000s. Lowering tax rates modestly at the federal level had a minimal effect on financial behavior, but it had a large impact on government revenues. Not surprisingly, Kansas’ results were similar.
Incentives matter: There was a large behavioral incentive, but it was for financial engineering. Brownback eliminated taxes on limited liability companies and sole proprietorships. It isn't surprising that lots of companies and individuals made these legal structural changes. But this was merely an alteration in form with no beneficial economic incentives.
Set reasonable benchmarks for success or failure: Brownback, despite making large promises, wasn't specific in how success or failure should be measured. Specific economic metrics should have been set (unemployment, job increases, household income, tax revenue, etc.). It is important to include specific dates as well, not leaving the experiment open-ended.
Instead, Kansas lacked a robust approach to evaluating results. This is a poor strategy if you want to know how you are doing.
Have an exit strategy: Because Kansas didn't focus on specific and measurable benchmarks, it had no way to know when to pull the plug. This is important, as the legislature was forced to wait until things were unequivocally bad and getting worse before taking steps to end the experiment. An exit strategy based on specific goals would have saved a lot of unnecessary austerity-induced pain for the people of Kansas.
Set reasonable expectations: Soaring rhetoric might work on the campaign trail, but it isn't great for legislating or governing. As business-management consultant Tom Peters advocates, underpromising and overdelivering makes it more likely your experiment will succeed in the eyes of your customers -- and taxpayers.
Share information freely: We knew the Kansas experiment was going badly when the executive branch decided to stop reporting economic news about it. Aside from being intellectually dishonest, removing data from public view does nothing to help other states avoid repeating your errors.
Win or lose, take responsibility: Broad proof of the failure of Brownback’s tax cuts led the legislature to begin unraveling them. Rather than admitting defeat, Brownback vetoed its actions. His refusal to accept a verdict reflects a failure to recognize and take responsibility for his own policies.
By just about every measure, Kansas' economic laboratory experiment is now over, and the results are in. Supply-side tax cuts as executed in Kansas don't generate more economic growth or create more jobs. They reduce tax revenue and forced the government to cut spending on essential goods and services like roads and schools.
The reasons for this are many, but come down to a clash of theory versus reality. People don't upend their business or personal lives in response to modest changes in the tax code. And despite the antigovernment rhetoric, people want good schools and well-maintained infrastructure where they live. The next politico who wants to engage in a statewide tax experiment would do well to remember that.
New Jersey under Republican Governor Chris Christie led the U.S. with the most residents moving away; Oregon was the state that had the most people arriving in 2015.
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